SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [__]
Check the appropriate box:
[X] Preliminary Proxy Statement [__] Confidential, For Use of
the Commission Only
(as permitted by Rule
14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11 or Rule 14a-12
AMERICAN ASSET ADVISERS TRUST, INC.
AAA NET REALTY FUND X, LTD.
AAA NET REALTY FUND IX, LTD.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE
REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules
240.0-11(c)(1)(I) and (c)(3).
(1) Title of each class of securities to which transaction
applies: Common Stock, $.01 par value, of American
Asset Advisers Trust, Inc. (the "Common Stock").
(2) Aggregate number of securities to which transaction
applies: up to 3,017,107 shares of Common Stock.
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth
the amount on which the filing fee is calculated and
state how it was determined): $9.34 per share. The price
per share for the purposes of the transaction.
(4) Proposed maximum aggregate value of transaction: $28,110,925
(5) Total fee paid: $5,623
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
JOINT CONSENT SOLICITATION STATEMENT
AND PROSPECTUS
AMERICAN ASSET ADVISERS TRUST, INC.
This Joint Consent Solicitation Statement and Prospectus (the
"Prospectus") is being provided by the Board of Directors of AMERICAN ASSET
ADVISERS TRUST, INC., a Maryland corporation ("AmREIT") and H. Kerr Taylor (the
"General Partner"), the individual general partner and/or the controlling
person of the corporate general partner to the limited partners (collectively,
"Limited Partners") holding of Limited Partner interest ("Units") in any of
the following ten limited partnerships: Taylor Income Investors III, Ltd.
("FUND III"), Taylor Income Investors IV, Ltd. ("FUND IV"), Taylor Income
Investors V, Ltd. ("FUND V"), Taylor Income Investors VI, Ltd. ("FUND VI"), AAA
Net Realty Fund VII, Ltd. ("FUND VII"), AAA Net Realty Fund VIII, Ltd. ("FUND
VIII"), AAA Net Realty Fund Goodyear, Ltd. ("AAA GDYR"), AAA Net Realty Fund
IX, Ltd. ("FUND IX"), AAA Net Realty Fund X, Ltd. ("FUND X") and AAA Net Realty
Fund XI, Ltd. ("FUND XI").
AmREIT and the General Partner are proposing a series of mergers
whereby AmREIT will acquire all of the assets and the liabilities of the
Partnerships (collectively the "Merger") pursuant to an Agreement and Plan of
Merger, dated as of ___________, 1998 between AmREIT and each Partnership
(collectively, the "Merger Agreement"), the form of which is included as Annex
1 to this Prospectus. In connection with the Merger, AmREIT is offering to
issue in the aggregate up to 3,009,735 shares of its $0.01 par value common
stock (the "Shares"), or in lieu thereof, up to $4,980,370 in principal amount
of 6.0% Convertible Notes due in December 31, 2004 (the "Notes"); provided,
however, AmREIT will not issue Notes in a principal amount exceeding 20% of the
aggregate Net Asset Value of the Partnership electing to participate in the
Merger (the "Note Restriction"). Limited Partners of Partnerships
participating in the Merger ("Participating Partnerships") may elect to receive
Shares or Notes with respect to their Units in accordance with the Net Asset
Value, as defined, of their respective Partnership. See "THE MERGER - Exchange
Ratio."
This Prospectus is furnished to the Shareholders of AmREIT in
connection with the solicitation of their consents (the "AmREIT Consents")
approving the Merger and by the General Partner to the Limited Partners of the
Partnerships in connection with the solicitation of their consents (the
"Partnership Consents") approving the Merger and an amendment to the Agreement
of Limited Partnership of their Partnership (the "Partnership Amendment")
authorizing the Merger. The Independent Directors and the General Partner
believe that the benefits and advantages of the Merger far outweigh the
negative factors and risks. See "THE MERGER -- The Independent Directors'
Reasons and Recommendations for the Merger" and "-The General Partner's Reasons
and Recommendations for the Merger." See "Risk Factors And Considerations" for
certain factors relating to participation in the Merger.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., CENTRAL STANDARD
TIME, ON _____________, 1998, UNLESS EXTENDED. ALL QUESTIONS AND INQUIRIES
SHOULD BE DIRECTED TO TIMOTHY W. KELLEY, VICE PRESIDENT, BY TOLL-FREE
TELEPHONE AT (800) 888-4400, EXTENSION 26.
THE INDEPENDENT DIRECTORS OF AmREIT UNANIMOUSLY RECOMMEND THAT THE
SHAREHOLDERS OF AmREIT VOTE "YES" IN FAVOR OF THE MERGER. THE BOARD REQUESTS
THAT EACH SHAREHOLDER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS VOTE
"YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH LIMITED
PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS POSSIBLE.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT
PASSED ON THE FAIRNESS OR MERITS OF THE TRANSACTION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Consent Solicitation Statement and
Prospectus is _______________, 1998
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER THE LAWS OF ANY STATE EXCEPT THE STATE OF CALIFORNIA. THE SHARES
AND THE NOTES ARE BEING ISSUED IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION
UNDER SUCH LAWS. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
FOLLOWING A FAIRNESS HEARING HELD PURSUANT TO SECTION 25142 OF THE CALIFORNIA
CORPORATE SECURITIES LAW OF 1968, AS AMENDED, HAS ISSUED A PERMIT FOR THE SALE
OF THE SECURITIES DESCRIBED HEREIN. THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF THE
SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY AmREIT, THE GENERAL PARTNER OR THE PARTNERSHIPS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SHARES AND THE NOTES OR AN OFFER TO OR
SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH THE OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
Upon consummation of the Merger, substantially all of the properties
owned by the Participating Partnerships will be owned by AmREIT, and such
properties will continue to be managed and leased by AmREIT directly or
through one or more affiliates. The officers and directors of AmREIT prior to
the Merger will continue to serve after the Merger. The form of Merger
Agreement between the Partnerships and each Partnership is attached to this
Prospectus as Annex 1. Due to the Note Restriction, AmREIT may not be in a
position to honor the requests of all Participating Limited Partners electing
to exchange their Units for Notes. If the Note Restriction were to apply,
AmREIT would issue Notes first to Partners voting against the Merger and then,
subject to the Note Restrictions, to Participating Limited Partners requesting
Notes.
Assuming all the Partnerships participate in the Merger, based on
5,740,745 outstanding Shares upon consummation of the Merger, approximately
52.35% of which would be held by the Limited Partners. Based on a price of
$9.34 per Share, the Exchange Price, if the Merger is approved and consummated,
the total market value of AmREIT, based on the Exchange Price, will be
approximately $53,618,558 and the maximum consideration of 3,005,498 shares to
be received collectively by the Limited Partners would have a value of
approximately $28,071,351 based on the Exchange Price. Upon consummation of
the Merger, the General Partner will own approximately 10.68% of AmREIT's
outstanding Shares. For a description of the Merger Agreement, see "The
Merger."
CONSIDERATION OFFERED BY AMREIT
As consideration for the merger of the Partnerships into AmREIT,
AmREIT is offering to issue up to a total of 3,009,735 of its shares of $0.01
par value common stock. The Shares which will be allocated
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to the Participating Partnerships in accordance with their respective Net Asset
Values ("NAV"). Each Partnership's NAV equals the price of its properties plus
its Net Cash as of the Effective Date of the Merger. Based upon his or her
Partnership's Net Asset Value at March 31, 1998, a Limited Partner will have
the right to elect to receive Shares or Notes per $1,000 of his or her original
investment in the Partnership as follows:
SHARES AND NOTES OFFERED IN THE MERGER
PER $1,000 ORIGINAL INVESTMENT
BASED ON PARTNERSHIP NAV AT 3/31/1998(1)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
SHARES PER $1,000 OF NOTE PER $1,000
PARTNERSHIP ORIGINAL INVESTMENT ORIGINAL INVESTMENT
----------- ------------------- -------------------
<S> <C> <C>
FUND III 127.30 $1,182
FUND IV 88.76 753
FUND V 93.85 870
FUND VI 101.71 944
FUND VII 97.95 858
FUND VIII 104.00 982
AAA GDYR 86.79 804
FUND IX 98.06 824
FUND X 97.58 774
FUND XI 97.62 772
</TABLE>
(1) The Net Asset Value is equal to the price paid for Partnership
properties plus the Net Cash at Closing and is subject to adjustment
for Net Cash as of the Effective Date. The assigned Net Asset Value
does not necessarily reflect the aggregate price at which the Shares
may be sold.
- ----------
RETURN ON ORIGINAL INVESTMENT
HISTORICAL CASH DISTRIBUTIONS AND NAV
ALLOCATED TO THE LIMITED PARTNERS
<TABLE>
<CAPTION>
CUMULATIVE
DISTRIBUTIONS TO TOTAL NAV(2)ALLOCATED TOTAL OF CUMULATIVE PERCENT OF $1,000
LIMITED PARTNERS TO LIMITED PARTNERS DISTRIBUTIONS OF ORIGINAL
PARTNERSHIP THROUGH 3/31/1998 AS OF 3/31/1998 AND NAV INVESTMENT
- ----------- ----------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
FUND III $1,061,972 $1 ,123,621 $2,092,861 237.59%
FUND IV 437,214 509,865 1,020,115 157.10%
FUND V 417,088 420,749 861,144 182.05%
FUND VI 231,753 285,000 531,753 177.61%
FUND VII 824,602 1,029,277 1,803,519 168.92%
FUND VIII 1,252,756 1,806,708 3,198,433 169.01%
FUND GDYR 769,027 1,082,154 1,812,521 146.08%
FUND IX 2,677,023 4,937,264 7,741,138 145.54%
FUND X 3,350,487 10,438,594 13,814,034 124.44%
FUND XI 820,472 6,438,116 7,145,701 106.35%
</TABLE>
(1) Represents cash distributions from operations and return of capital
declared from inception through March 31, 1998.
(cover page continued)
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<PAGE>
(2) The Net Asset Value is equal to the price paid for Partnership
properties plus the Net Cash at Closing and is subject to adjustment
for Net Cash as of the Effective Date. The assigned Net Asset Value
does not necessarily reflect the aggregate price at which the Shares
may be sold.
- ----------
DISTRIBUTION COMPARISON. The following table sets forth the
distributions paid by the Partnerships during the year ended December 31, 1997
per $1,000 original investment in a Partnership and the dividends which would
have been paid by AmREIT during the year ended December 31, 1997 had the shares
offered in the Merger per $1,000 original investment in a Partnership been
owned during that period.
<TABLE>
<CAPTION>
PARTNERSHIP DISTRIBUTIONS DECLARED DIVIDENDS DECLARED DURING YEAR ENDED
DURING YEAR ENDED 12/31/1997 12/31/1997 ON SHARES RECEIVED IN MERGER
PARTNERSHIP PER $1,000 INVESTMENT PER $1,000 OF ADJUSTED CAPITAL
- ----------- ---------------------------------- ---------------------------------------
<S> <C> <C>
FUND III $96.53 $91.37
FUND IV 62.00 63.02
FUND V 83.00 69.47
FUND VI 80.00 73.51
FUND VII 83.00 69.54
FUND VIII 86.00 74.08
FUND GDYR 81.67 66.93
FUND IX 85.55 69.62
FUND X 81.73 69.28
FUND XI 69.14 69.31
</TABLE>
- ----------
NO DISSENTERS' RIGHTS
THE AMREIT SHAREHOLDERS WILL NOT HAVE DISSENTER'S APPRAISAL RIGHTS AS
A RESULT OF THE MERGER. If a Limited Partner in a Participating Partnership
votes AGAINST the Merger, he or she will not be entitled to dissenters' or
appraisal rights under the Partnership Agreements or Texas or Nebraska
Partnership Law, nor will such rights be provided by Partnerships or AmREIT.
See "CONSENT PROCEDURES."
PURPOSES OF THE MERGER
The purpose of the Merger for AmREIT is to strategically combine
AmREIT and the Partnerships which have compatible properties in complimentary
markets. The purpose of the Merger for the Partnerships is to combine the
Partnerships with AmREIT and become a part of a larger and more diversified
real estate investment trust (generally, a "REIT"). This combination will
allow the Partnerships to take advantage of the growth in the REIT industry and
real estate markets in general and the potential of growth and liquidity for
AmREIT. Also, partners in Participating Partnerships ("Participating
Partners") currently holding Units will have the opportunity to liquidate their
investment through the sale of their Shares or to retain their investment
indefinitely. The Partnerships have a fixed (finite) life, cannot increase
their investment base through equity or debt financing or reinvestment of
operational or property sale revenues and must liquidate upon the sale of their
properties or upon the expiration of their term,
(cover page continued)
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<PAGE>
whichever is the first to occur. Partners desiring to retain a fixed life
investment should consider election to receive Notes for their Units.
POTENTIAL BENEFITS TO AMREIT SHAREHOLDERS
The Independent Directors believe the Merger is fair to and in the
best interests of AmREIT and its shareholders for a number of reasons,
including the following:
o The Independent Directors believe that the Merger will allow
AmREIT to realize economies of scale by spreading costs over a
larger number of properties, thereby improving AmREIT's profit
margin.
o As a result of the Merger, AmREIT will acquire the
Partnerships' properties, most of which are located in
AmREIT's existing market.
o Following the Merger, AmREIT will be in the financial position
to improve its access to attractively priced alternative
sources of capital by expanding its geographic diversification
and thereby reducing its vulnerability to recessions in any
particular region.
o The Independent Directors considered the Bishop Crown Opinion
that the consideration to be paid by AmREIT pursuant to the
Merger was fair, from a financial point of view, to AmREIT as
of the date of such opinion, based upon and subject to certain
matters stated therein.
o The Merger should help increase (be accretive to) AmREIT's
cash flow and FFO per Share. FFO is a widely accepted measure
of an equity REIT's operating performance. An increase in cash
flow and FFO per Share as a result of the Merger or any other
reason may result in a greater likelihood that distributions
will be made to shareholders.
o The Independent Directors believe the Merger will facilitate
and permit AmREIT to sooner establish a secondary market for
its shares and thereby liquidity for its shareholders.
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the economic terms of the
Merger Agreement, including the Exchange Ratio for each
Partnership and the approximately 52.35% equity interest in
the combined AmREIT entity to be received by the Limited
Partners, assuming all Partnerships participate in the Merger,
are favorable to the Limited Partners.
o The General Partner believes that the Net Asset Values of the
Partnerships represent fair estimates of the value of the
Partnership assets, net of liabilities, as of December 31,
1997, and constitute a reasonable basis for allocating the
consideration offered by AmREIT among all Partnerships that
may be combined through the Merger.
(cover page continued)
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<PAGE>
o By combining the Partnerships with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of any of the
Partnerships. The General Partner therefore concluded that
this increased size and the resulting consolidation of
operations would spread the risk of an investment in AmREIT
over a broader group of assets and reduce the dependence of
the investment upon the performance of any particular asset or
group of assets, such as assets in the same geographical area.
o Each Participating Partnership is required to pay only its
share ("Proportionate Share") of the Partnership Merger
Expenses based on its relative Net Asset Value. Also, if the
Limited Partners of a Partnership do not elect to participate
in the Merger, the General Partner will pay or reimburse such
Partnership its Proportionate Share of the Partnership Merger
Expenses.
o As a result of the Merger, a partnership will no longer
prepare its separate financial statements, any required annual
and quarterly filings, tax returns and investor
communications. The accurate preparation of these statements
and reports requires substantial cost and management time and
effort.
o The General Partner believes that in the future, the combined
entity will have improved access to capital markets for future
growth and Limited Partners will have enhanced liquidity as a
result of the larger total equity market capitalization of the
combined entity.
o The General Partner has solicited and the Merger is conditioned
upon receipt of the fairness opinions of Houlihan Lokey Howard
& Zukin Financial Advisers, Inc. ("Houlihan")(the "Houlihan
Fairness Opinions") that the consideration to be received by
the limited partners of each participating Partnership in
connection with the Merger is fair, from a financial point
of view, to such limited partners.
o Each Partnership owns at least one of its properties in joint
venture with one or more other persons. Where its interest in
a property is a minority interest, the Partnership would not
be able to sell the property without the consent of its joint
venturer(s). In the Merger, AmREIT would acquire a
Participating Partnership's joint venture interest at a value
pro rata to that offered for the entire property.
o The terms of many of the leases on properties owned by the
older partnerships, most notably Fund III, Fund IV, Fund V and
Fund VI, expire within the next five years. The costs of
rehabilitating these properties for new tenants, if required,
could be substantial. It is also possible that new tenants
for these properties could be difficult to obtain. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o In general, the Partnership properties are special purpose
properties suitable for limited types of tenants and uses.
If necessary, the Partnership could experience difficulty in
finding suitable replacement tenants or buyers for these
special purpose properties. As a result of the Merger,
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these risks would be spread over and more economically
absorbed by AmREIT's larger and more diversified portfolio.
o A strategic combination with a publicly held REIT which takes
advantage of the growth in the REIT industry and real estate
markets is preferable to the alternatives of complete
liquidation of the Partnerships, continuation of the
Partnerships or reorganization of the Partnerships into one
REIT or up to 10 separate REITS;
o AmREIT will be taxed as a corporation if it fails to qualify
as a REIT.
POTENTIAL ADVERSE CONSEQUENCES TO SHAREHOLDERS
The Merger may have the following adverse consequences for AmREIT's
shareholders:
o The fair market value of AmREIT's Shares may be greater than
the Exchange Price of $9.34 per share prior to the
consummation of the Merger with no corresponding adjustment
being made to the Exchange Ratio.
o AmREIT intends to immediately incur substantial additional
borrowings (leverage) upon completion of the Merger, although
its total borrowings ("Leverage") as a percentage of the fair
market value of its properties is not expected to
significantly increase.
o AmREIT may expand into new regions and markets where it has
little, if any, prior experience.
o The cost of the Merger, both financially and in terms of the
time and effort of management required to effectuate the
Merger, are expected to be significant. AmREIT's share of the
costs and expenses of the Merger (the "Merger Expenses") is
expected to total approximately $300,000.
o The anticipated benefits of the Merger may not be realized.
o AmREIT will be assuming all liabilities of each Participating
Partnership, including undisclosed liabilities.
POTENTIAL ADVERSE CONSEQUENCES TO LIMITED PARTNERS
The Merger may have the following adverse consequences for the Limited
Partners:
o The possibility that the Net Asset Values assigned to each of
the Partnerships may not reflect the actual value of such
Partnership's assets.
o The Exchange Ratio (as defined below) is fixed. The
Participating Partners will not receive more Shares if the
value of the Shares decreases and AmREIT will not issue fewer
Shares (or a Note in a smaller principal amount) if the value
of the Shares increases.
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<PAGE>
o AmREIT's Shares are not publicly traded, AmREIT does not
intend to list the Shares immediately upon completion of the
Merger, and a market for the Shares is not expected to exist
immediately upon completion of this Merger.
o The Shares may initially trade, when and if a public trading
market is established, at prices substantially below the
Exchange Price on which the allocation of the Shares among the
Partnerships was based.
o The Merger will be a taxable transaction for each
Participating Partner.
o Participating Partners who become shareholders of AmREIT may
not receive the same level of distributions as previously
received from their respective Partnership.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties relating to the capital
structure of AmREIT following consummation of the Merger as a
result of the possibility that some of the Partnerships may
not participate in the Merger.
o There would be a change in the nature of each Limited
Partner's investment in a Participating Partnership from
holding an interest in a specified portfolio of properties in
a finite life entity to holding an equity investment in an
ongoing REIT, whose portfolio of properties may be changed
from time to time without the approval of its shareholders and
which does not plan to liquidate such assets within a fixed
period.
o The General Partner, who is also an Affiliate of AmREIT, has
negotiated the terms of the Merger on behalf of all the
Partnerships. Each Partnership was not separately represented
by parties independent from the General Partner. Had separate
representation been arranged for a Partnership, the terms of
the Merger might have been more favorable to such Partnership.
Further, issues unique to the value of a particular
Partnership might have resulted in adjustments increasing or
decreasing the number of Shares (and amount of Notes)
allocable to such Partnership.
o The General Partner currently owns 10.62% of AmREIT's
outstanding Shares and, pursuant to the terms of the recently
completed Adviser Acquisition, has the right to receive
subject to certain conditions up to an additional 686,740
shares. By reason of the Merger, the General Partner will be
entitled to receive up to 349,333 of such additional shares.
Thus, upon consummation of the Merger, the General Partner
may own up to 10.68% of AmREIT's outstanding Shares.
o A majority vote of Limited Partners binds each Partnership; if
the Merger is approved, Limited Partners who vote against the
Merger will have their Units converted into Shares, based on
the Exchange Price, and Notes.
o Partners of Participating Partnerships who vote against the
Merger will receive Notes for their Units in the Merger unless
they elect to receive Shares.
o The costs of the Merger allocated to the Partnerships are
limited to certain costs of the Houlihan Fairness Opinions,
the Partnership accounting costs (and other valuation or
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appraisal costs, if any), which are estimated to total
$150,000, and any direct partner communication costs.
Each Participating Partnership will bear these costs in
proportion to its relative NAV. The General Partner will
pay or reimburse each non- Participating Partnership for
its portion of these costs.
o The anticipated benefits of the Merger may not be realized.
RISKS INVOLVING AMREIT
There are in addition, risks involving an investment in AmREIT and the
real estate business in general, including the following:
o The proceeds of future asset sales or refinancings by AmREIT
generally will be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors may change the investment,
acquisition and financing policies of AmREIT (including
policies regarding the level of indebtedness) without a vote
of the shareholders, which could result in policies which do
not reflect the interests of all shareholders.
o AmREIT will be taxed as a corporation if it fails to qualify
as a REIT.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) in order to
acquire additional, as yet unidentified, real estate.
o The benefits of self-management of AmREIT resulting from the
recently completed Adviser Acquisition may not be fully
realized.
This Prospectus also constitutes a prospectus of AmREIT in respect of
the Shares and Notes to be issued to the Participating Partners in connection
with the Merger. This Prospectus and the accompanying consent cards are first
being mailed to shareholders of AmREIT and the Limited Partners on or about
___________, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SEE "RISK FACTORS" FOR CERTAIN RISKS RELATING TO PARTICIPATION IN THE MERGER.
(cover page continued)
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AVAILABLE INFORMATION
AmREIT has filed with the California Department of Corporations
(the"Department") Applications for Qualification of Securities (together, the
"Application") under the California Corporate Securities Law of 1968, as
amended, with respect to the Shares and Notes to be issued in the Merger. This
Prospectus does not contain all the information set forth in the Application.
In particular, the Application contains certain exhibits which are not included
herein, including financial statements with respect to each of the
Partnerships. For further information regarding AmREIT and the Shares and
Notes offered hereby, reference is made to the Application and the exhibits and
schedules attached thereto. Copies of such materials may be examined at the
Department of Corporations, 1350 Front Street, San Diego, California.
AmREIT, Fund IX and Fund X are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports, proxy or consent
solicitation statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy or consent solicitation
statements and other information filed by AmREIT, Fund IX and Fund X with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its Regional Offices at Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York, New
York 10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the prescribed fees. The Commission maintains a Web site that
contains reports, proxy or consent solicitation and information statements and
other information regarding AmREIT, Fund IX and Fund X and other registrants
that have filed electronically with the Commission. The address of such site is
http://www.sec.gov. AmREIT's reports, proxy or consent solicitation statements
and other information may and can also be inspected and copied at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
This Prospectus has been filed jointly by AmREIT, Fund IX and Fund XI
under Section 14(a) of the Exchange Act with the Commission.
Certain supplements to this Prospectus have been prepared for each
partnership to highlight the risks, effects and fairness of the Merger that are
particular to the respective Partnership. The Limited Partners of each such
Partnership will receive, with this Prospectus, the Supplement that corresponds
to their Partnership. The Limited Partners of a particular Partnership may also
receive copies of the supplements prepared for any or all of the Partnerships
and copies of such supplements will be provided promptly, without charge, to
each Limited Partner or his representative who has been so designated in
writing upon written request to the particular Partnership at Eight Greenway
Plaza, Suite 824, Houston, Texas 77046.
All information contained in this Prospectus with respect to AmREIT
has been supplied by AmREIT, and all information with respect to each
Partnership has been supplied by such Partnership.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Prospectus, and if given or made, such information or
representation must not be relied upon. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than
the securities to which it relates, nor does it constitute an offer to or
solicitation of any person in any jurisdiction to whom it would be unlawful to
make
(cover page continued)
-x-
<PAGE>
such an offer or solicitation. The delivery of this Prospectus at any time does
not imply that the information herein is correct as of any time subsequent to
the date hereof.
(cover page continued)
-xi-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consideration Offered by AmREIT . . . . . . . . . . . . . . . . . . . . . . -ii-
Return on Original Investment . . . . . . . . . . . . . . . . . . . . . . . -iii-
No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . -iv-
Purposes of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . -iv-
Potential Benefits to AmREIT Shareholders . . . . . . . . . . . . . . . . . -v-
Potential Benefits to Limited Partners . . . . . . . . . . . . . . . . . . . -v-
Potential Adverse Consequences to Shareholders . . . . . . . . . . . . . . . -vii-
Potential Adverse Consequences to Limited Partners . . . . . . . . . . . . . -vii-
Risks Involving AmREIT . . . . . . . . . . . . . . . . . . . . . . . . . . . -ix-
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -x-
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Parties to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Summary of Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
Consent Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
Record Date; Votes Required; Investor Lists . . . . . . . . . . . . . . . . -9-
Description of The Merger . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Organizational Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Reasons For The Merger And Recommendations . . . . . . . . . . . . . . . . . -14-
The Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
The Fairness Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Material Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . -21-
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . -22-
Management, Operations and Headquarters after the Merger . . . . . . . . . . -22-
Conditions to Consummation of the Merger . . . . . . . . . . . . . . . . . . -22-
Anticipated Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . -23-
Conduct of Business Pending the Merger . . . . . . . . . . . . . . . . . . . -23-
Merger Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Termination Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Comparison of the Partnerships and AmREIT . . . . . . . . . . . . . . . . . -24-
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Risks Associated With the Merger . . . . . . . . . . . . . . . . . . . . . . -26-
Risks Associated With an Investment in AmREIT . . . . . . . . . . . . . . . -31-
Risks Associated with an Investment in the Shares . . . . . . . . . . . . . -36-
Risk Considerations Associated with the Notes . . . . . . . . . . . . . . . -37-
Risks Associated with an Investment in Real Estate . . . . . . . . . . . . . -40-
Risks Associated With Federal Income Taxation of AmREIT . . . . . . . . . . -46-
</TABLE>
-xii-
<PAGE>
<TABLE>
<S> <C>
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
Background on The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
The Independent Directors' Reasons and Recommendations for the Merger . . . -50-
The General Partner's Reasons and Recommendations for the Merger . . . . . . -52-
Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Continuation of Partnerships . . . . . . . . . . . . . . . . . . . . . . . . -55-
Reorganization of Partnerships as One REIT or as Separate REITs . . . . . . -56-
Offers From Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . -61-
The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-
Amendment, Supplement and Waiver . . . . . . . . . . . . . . . . . . . . . . -67-
Allocation of the Merger Consideration . . . . . . . . . . . . . . . . . . . -67-
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . -74-
Fiduciary Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . -75-
Market Prices and Distributions . . . . . . . . . . . . . . . . . . . . . . -77-
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . -78-
Management, Operations and Headquarters after the Merger . . . . . . . . . . -78-
Conditions to Consummation of the Merger . . . . . . . . . . . . . . . . . . -78-
Conduct of Business Pending the Merger . . . . . . . . . . . . . . . . . . . -79-
Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . -82-
Termination; Extension, Waiver and Amendment . . . . . . . . . . . . . . . . -83-
Effect of Termination and Abandonment . . . . . . . . . . . . . . . . . . . -84-
Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -86-
Proposed Amendments to Partnership Agreements . . . . . . . . . . . . . . . -86-
The Merger Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . -87-
Anticipated Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . -87-
THE FAIRNESS OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -88-
The Bishop-Crown Fairness Opinion . . . . . . . . . . . . . . . . . . . . . -88-
The Houlihan Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . -95-
AMREIT PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . -101-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF AMREIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -102-
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . -102-
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . -103-
MATERIAL FEDERAL INCOME TAX ASPECTS . . . . . . . . . . . . . . . . . . . . . . . . . -105-
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -105-
Requirements for Qualifications and Taxation as a REIT . . . . . . . . . . . -106-
Distribution Requirements . . . . . . . . . . . . . . . . . . . . . . . . . -110-
Termination or Revocation of REIT Status . . . . . . . . . . . . . . . . . . -111-
Taxation of AmREIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -112-
Taxation of Domestic Shareholders . . . . . . . . . . . . . . . . . . . . . -113-
Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . -115-
Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . -116-
United States Report Requirements . . . . . . . . . . . . . . . . . . . . . -116-
</TABLE>
-xiii-
<PAGE>
<TABLE>
<S> <C>
State and Local Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . -116-
AMREIT AND ITS BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -116-
Description of AmREIT . . . . . . . . . . . . . . . . . . . . . . . . . . . -116-
AmREIT's Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . -117-
AmREIT's Stated Investment Policies . . . . . . . . . . . . . . . . . . . . -118-
AmREIT's Operating Strategy . . . . . . . . . . . . . . . . . . . . . . . . -122-
Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . -126-
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -126-
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -126-
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -127-
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -128-
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -128-
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . -130-
Security Ownership of Certain Beneficial Owners and Management . . . . . . . -131-
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . -131-
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -132-
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . -132-
AMREIT CHARTER AND BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -136-
Authorized Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -136-
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -136-
Shareholder Meetings and Special Voting Requirements . . . . . . . . . . . . -136-
Amendment of the Charter and Bylaws . . . . . . . . . . . . . . . . . . . . -137-
Transactions With Interested Officers or Directors . . . . . . . . . . . . . -137-
Rollup Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . -137-
Limitations on Holdings and Transfer . . . . . . . . . . . . . . . . . . . . -137-
Anti-takeover Effect of Authorized But Undesignated Preferred Stock . . . . -138-
Liability for Monetary Damages . . . . . . . . . . . . . . . . . . . . . . . -138-
Indemnification And Advancement of Expenses . . . . . . . . . . . . . . . . -139-
DESCRIPTION OF AMREIT'S CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . -140-
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -140-
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -140-
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -141-
REPORTS TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -141-
THE PARTNERSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -142-
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -142-
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -142-
Partnership Property Information . . . . . . . . . . . . . . . . . . . . . . -143-
Partnership Distributions . . . . . . . . . . . . . . . . . . . . . . . . . -146-
Management of the Properties . . . . . . . . . . . . . . . . . . . . . . . . -147-
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -147-
COMPARISON OF OWNERSHIP OF UNITS AND SHARES . . . . . . . . . . . . . . . . . . . . . -147-
</TABLE>
-xiv-
<PAGE>
<TABLE>
<S> <C>
Form of Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . -148-
Length of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . -148-
Properties and Diversification . . . . . . . . . . . . . . . . . . . . . . . -149-
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . -149-
Additional Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -149-
Borrowing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -150-
Restrictions upon Related Party Transactions . . . . . . . . . . . . . . . . -150-
Management Control and Responsibility . . . . . . . . . . . . . . . . . . . -151-
Management Liability and Indemnification . . . . . . . . . . . . . . . . . . -152-
Anti-takeover Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . -153-
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -155-
Limited Liability of Investors . . . . . . . . . . . . . . . . . . . . . . . -155-
Review of Investor Lists . . . . . . . . . . . . . . . . . . . . . . . . . . -156-
Taxation of Taxable Investors . . . . . . . . . . . . . . . . . . . . . . . -156-
Taxation of Tax-exempt Investors . . . . . . . . . . . . . . . . . . . . . . -157-
Distribution Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . -157-
Comparative Compensation, Fees and Distributions . . . . . . . . . . . . . . -158-
COMPARISON OF UNITS, SHARES AND NOTES . . . . . . . . . . . . . . . . . . . . . . . . -160-
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -161-
Taxation of Taxable Investors . . . . . . . . . . . . . . . . . . . . . . . -162-
Taxation of Distributions/Dividends . . . . . . . . . . . . . . . . . . . . -163-
Taxation of Tax-Exempt Investors . . . . . . . . . . . . . . . . . . . . . . -164-
CONSENT PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -164-
AmREIT Consent Procedures . . . . . . . . . . . . . . . . . . . . . . . . . -164-
Withdrawal Rights; Change of Vote . . . . . . . . . . . . . . . . . . . . . -166-
Partnership Consent Procedures . . . . . . . . . . . . . . . . . . . . . . . -167-
Withdrawal Rights; Change of Vote . . . . . . . . . . . . . . . . . . . . . -169-
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -170-
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -170-
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -170-
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -171-
</TABLE>
-xv-
<PAGE>
SUMMARY
The following summary is qualified in all respects by the information
appearing elsewhere in this Prospectus, the Annexes hereto and the documents
referred to herein. All initial capitalized terms shall have the meanings set
forth in the Glossary.
PARTIES TO THE MERGER
AMREIT AmREIT is a self-managed REIT. AmREIT was organized on
August 17, 1993, as a Maryland business corporation and
operates as a real estate investment trust ("REIT") under
the federal income tax laws. AmREIT became self-managed upon
its acquisition of its external adviser as of June 5, 1998.
See "AmREIT - Adviser Acquisition." AmREIT acquires,
develops, owns and manages a diversified portfolio of
quality, frontage retail properties leased to national and
regional retail tenants. Each of AmREIT's properties has
been initially leased under a full-credit, long-term net
lease, under which the tenant is responsible for the
operation costs of the property, including taxes, insurance
and maintenance costs. As of the date of this Prospectus,
AmREIT owned a total of 14 properties and has contracted to
acquire one additional property under development. The term
"development" means that acquisition of the underlying land
is contracted for, the property is under lease, subject to
timely completion, and construction is anticipated to
commence within six months. The aggregate purchase prices of
these 15 properties are approximately $23,812,107 and total
annual rents on these 15 properties are approximately
$2,344,320. These 15 properties have an annualized initial
capitalization rate (current cash on cost return, where cost
includes all costs related to the acquisition, development,
leasing and financing) of approximately 10.7%. These
properties are leased to a total of 8 different tenants and
are located in 7 states and contain an aggregate of
approximately 193,920 square feet of gross leasable area.
AmREIT's principal executive offices are located at Eight
Greenway Plaza, Suite 824, Houston, Texas 77046, and its
telephone number is (713) 850- 1400.
THE GENERAL The General Partner, Mr. H. Kerr Taylor, sponsored and
PARTNER organized each of the Partnerships. Mr. Taylor serves
as the individual general partner of each Partnership other
than FUND III, FUND IV, FUND V, FUND VI and FUND VII, each
of which has only a corporate general partner. A different
corporation organized under the laws of the state of Texas
serves as the corporate general partner of each Partnership.
Mr. Taylor is a director, chief executive officer and the
80% or greater owner of each corporate general partner.
THE The Partnerships were initially organized to acquire income
PARTNERSHIPS producing real properties, primarily frontal retail
properties. FUND IX and FUND X were organized under the laws
of the state of Nebraska. Each of the other 8 Partnerships
is a limited partnership organized under the laws of the
state of Texas. Each Partnership is a finite life entity
and, pursuant to the terms of any Agreements of Limited
Partnership of the Partnerships (collectively, the
"Partnership Agreements"), no additional properties may be
acquired by any Partnership and upon the sale of any
property, the net proceeds are to be distributed to the
partners.
-1-
<PAGE>
THE PARTNERSHIPS
(CONT D.)
The Partnerships own, either directly or through a joint
venture, interests in real property comprised of fee
ownership interest in properties containing in the aggregate
135,000 net rentable square feet and a secured promissory
note in the principal amount of $215,000 (the "Atlas Note").
Each of the Partnerships held the following real estate
interests ("properties") on December 31, 1997.
<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP TENANT/USER (LOCATION) OWNED
----------- ----------- --------- ----------
<S> <C> <C>
FUND III Steak & Ale (Houston, TX) 44%
Bank of America (Houston, TX) 100%
Taco Bell (Houston, TX) 100%
FUND IV Steak & Ale (Houston, TX) 56%
Atlas Note 51.3%
FUND V Pizza Inn (Clute, TX) 50%
Whataburger (Clute, TX) 50%
La Petite Academy (Houston, TX) 6.02%
Atlas Note 48.7%
FUND VI Pizza Inn (Clute, TX) 50%
Whataburger (Clute, TX) 50%
La Petite Academy (Houston, TX) 2.74%
FUND VII La Petite Academy (Houston, TX) 91.25%
Whataburger (Dallas, TX) 54.88%
Superior Sound (Houston, TX) 27.28%
AFC, Inc. (Church's) (Houston, TX) 27.28%
Gannett (Billboard) (Houston, TX) 27.28%
FUND VIII Whataburger (Dallas, TX) 45.12%
Superior Sound (Houston, TX) 72.72%
AFC, Inc. (Church's) (Houston, TX) 72.72%
Gannett (Billboard) (Houston, TX) 72.72%
Discount Tire (Fort Worth, TX) 100%
La Petite Academy (Houston, TX) 100%
Goodyear Tire-Marsh Lane (Dallas, TX) 25.28%
AAA GDYR Goodyear Tire-Marsh Lane (Dallas, TX) 74.72%
Goodyear Tire-Hillcrest (Dallas, TX) 100%
FUND IX Foodmaker (Jack-in-the-Box) (Dallas, TX) 100%
Baptist Memorial Health (Memphis, TN) 100%
Waldenbooks-Payless (Austin, TX) 100%
Golden Corral - I-45 (Houston, TX) 100%
Golden Corral - Hwy 1960 (Houston, TX) 4.80%
</TABLE>
-2-
<PAGE>
THE PARTNERSHIPS
(CONT D.)
<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP TENANT/USER (LOCATION) OWNED
----------- ----------- --------- ----------
<S> <C> <C>
FUND X Golden Corral - Hwy 1960 (Houston, TX) 95.20%
TGI Friday's (Houston, TX) 100%
Goodyear Tire (Houston, TX) 100%
Computer City (Minneapolis, MN) 100%
AFC, Inc. (Popeye's) (Atlanta, GA) 100%
Blockbuster Music (Independence, MO) 45.16%
Onecare (Sugarland, TX) 100%
Just for Feet (Tucson, AZ) 18.25%
FUND XI Blockbuster Music (Wichita, KS) 49%
Blockbuster Video (Oklahoma City, OK) 100%
Just for Feet (Tucson, AZ) 29.85%
Bank United (The Woodlands, TX) 49%
Just For Feet (Baton Rouge, LA) 49%
Hollywood Video (Lafayette, LA) 25.42%
Pier 1 (Longmont, CO) 100%
</TABLE>
- ----------
The properties of the Partnerships are currently managed by AmREIT
Operating Corporation, a Texas corporation and AmREIT's wholly owned
subsidiary.
The address of the principal executive offices of each of the
Partnerships and the General Partner is Eight Greenway Plaza, Suite 824,
Houston, Texas 77046, telephone (713) 850-1400. For more information concerning
the Partnerships, see "THE PARTNERSHIPS."
SUMMARY OF RISK FACTORS
AmREIT's shareholders and the Limited Partners should carefully
consider the risks discussed under "Risk Factors" prior to voting on the
matters being submitted to them in connection with the Merger. Among the risks
related to the Merger are the following.
RISKS ASSOCIATED The Merger involves various risks, including the
WITH THE MERGER following.
o The Net Asset Values assigned to each of the
Partnerships may not reflect the true value of such
Partnership's assets because the Net Asset Values were
the result of negotiations between the common
management of AmREIT and the General Partner. Had
independent representation been arranged for each
Partnership, the Net Asset Value assigned to each
Partnership may have been different.
o The General Partner, who is an Affiliate of AmREIT,
negotiated the terms of the Merger on behalf of all the
Partnerships. Each Partnership was not separately
represented by parties independent from the General
Partner. Had
-3-
<PAGE>
RISKS ASSOCIATED WITH THE MERGER
(CONT D.)
separate representation been arranged for a
Partnership, the terms of the Merger might have been
more favorable to such Partnership. Further, issues
unique to the value of a particular Partnership might
have resulted in adjustments increasing or decreasing
the number of Shares allocable to such Partnership.
o The Exchange Ratio is fixed and will not be adjusted to
reflect the occurrence of events prior to the Closing
Date which might adversely or positively affect the
value of the Shares. If the trading price increases,
AmREIT will not receive the benefit of issuing fewer
Shares to the Limited Partners.
o The Shares are not traded in a regular market and there
is no assurance that the fair value of the Shares is
not less than (or greater than) the Exchange Price.
o The Exchange Price has been established for the
purposes of the Merger only. Neither management of
AmREIT nor the General Partner can assure or predict
whether the Shares will trade at a price lower than the
Exchange Price or lower than the value of AmREIT's
assets after the Merger if and when a public trading
market for the Shares is established. The Shares may,
if and when listed on an exchange or otherwise traded,
trade at prices substantially below the Exchange Price.
Consequently, a Limited Partner in a Participating
Partnership desiring to liquidate his investment after
the Merger may receive a price per Share that is lower
than the Exchange Price.
o Taxable income or loss will be recognized by each
taxable Limited Partner participating in the Merger in
an amount equal to the Limited Partner's allocable
share of the income or loss recognized by his
respective Partnership from the transfer of the
Partnerships' assets to AmREIT through the Merger and
Limited Partners will receive no cash from the Merger
(other than cash received in lieu of fractional Shares)
to pay taxes arising from any taxable income (see "The
Merger -- Material Federal Income Tax Consequences").
o Participating Limited Partners who become shareholders
of AmREIT may not receive the same level of
distributions as previously received from the
applicable Partnership. AmREIT has historically made
smaller annual distributions than many of the
Partnerships.
o The Merger will result in a change in the nature of
each Limited Partner's investment in a Participating
Partnership from holding an interest in a specific
portfolio of properties in a finite life entity to
holding an interest in an ongoing REIT, whose real
estate portfolio may be changed from time to time by
AmREIT's Board without the approval of the shareholders
and which does not plan to liquidate such assets within
a fixed period.
-4-
<PAGE>
RISKS ASSOCIATED WITH THE MERGER
(CONT D.)
o Limited Partners who became shareholders will have
fundamentally changed the nature of their initial
investment from an entity that is a traditional pass-
through entity for federal income tax purposes to an
investment in a REIT, which in general is not a
pass-through entity for federal income tax purposes
with the exception of certain undistributed long-term
capital gains. See "The Merger -- Material Federal
Income Tax Consequences."
o The General Partner controls each Partnership and is an
officer, director and the largest shareholder of
AmREIT, currently owning 10.62% of AmREIT's outstanding
common stock. In addition, under the terms of the
Adviser Acquisition, the Merger will entitle the
General Partner to receive additional REIT common
stock. After the Merger, assuming 100% participation,
the General Partner will own approximately 10.68% of
AmREIT's outstanding Shares. These relationships may
have influenced a General Partner's decision to
recommend the Merger to its Limited Partners.
o The size and diversity of AmREIT's portfolio after the
Merger is dependent upon which Partnerships approve the
Merger. Therefore, at the time a Limited Partner votes,
he will not know the ultimate nature of the portfolio
or the business and operations of AmREIT following the
Merger.
o The General Partner is prohibited by the Merger
Agreement from initiating, soliciting or encouraging
competing proposals with the Merger. This may result in
discouraging third parties from making such a competing
proposal.
o Expenses of the Merger will be borne by AmREIT except
for the costs of the Houlihan Opinions, the
Partnerships' accounting costs and certain other
miscellaneous costs and direct Partnership expenses.
RISKS An Investment in the AmREIT Shares or Notes involves
ASSOCIATED WITH certain risks, including the following.
AN INVESTMENT
IN AMREIT o Upon consummation of the Merger, AmREIT intends to
increase its leverage so that its total unsecured and
secured borrowings equal approximately 50% of the value
of its combined real estate portfolio.
o AmREIT intends to acquire one or more as yet
unidentified properties with additional borrowed funds.
Participating Partners will not have the opportunity to
review and analyze such property(ies) prior to the
Merger.
o AmREIT has only recently become self-managed as a
result of the Adviser Acquisition. There is no
assurance that the expected benefits of self-
management will be fully realized.
-5-
<PAGE>
RISKS
ASSOCIATED WITH AN INVESTMENT
IN AMREIT
(CONT D.)
o AmREIT will have potential liability for unknown,
undisclosed or contingent liabilities of the
Participating Partnerships, including claims against
AmREIT for indemnification, environmental liabilities,
and title defects, which could adversely affect the
cash liquidity of AmREIT and its future ability to make
distributions to shareholders.
o Shareholders of AmREIT will experience dilution of
their equity interests if there is an issuance of
additional equity securities at what may be less than
fair market value.
o Any declaration of distributions to shareholders is
subordinate to the payment of AmREIT's debts and
obligations, which could adversely affect the ability
of AmREIT to make distributions to shareholders in the
future.
o The majority vote of the Limited Partners of a
Partnership will cause the Partnership to participate
in the Merger. Limited Partners who voted against the
Merger will have their Units converted into Notes
unless they alternatively elect to receive Shares.
o Approval of the Merger will require the Limited
Partners to forego certain alternatives to the Merger,
such as liquidating the Partnerships or continuing to
operate the Partnerships as limited partnerships.
o AmREIT has different business objectives than the
Partnerships, including the intent to acquire new
properties and, from time to time, to dispose of
existing properties and reinvest the proceeds
therefrom, to the extent a distribution is not required
to maintain REIT status.
o Approval of the Merger by the Limited Partners will
result in the loss of their respective rights under the
applicable Partnership Agreement and the partnership
law of the applicable jurisdiction of organization of
each Partnership.
o If the Merger Agreement is terminated prior to
consummation, under certain circumstances, each
Partnership and AmREIT may have to pay their
Proportionate Share of a termination fee or of the
expenses of the Merger.
o AmREIT's organizational documents do not restrict
AmREIT's ability to incur additional indebtedness. As a
result, AmREIT could increase its debt service
requirements to a level that may adversely affect its
ability to make future distributions and may increase
the risk of default.
-6-
<PAGE>
RISKS
ASSOCIATED WITH AN INVESTMENT
IN AMREIT
(CONT'D.)
o Subject to AmREIT's stated investment policies, the
investment and operating policies of AmREIT are
determined by the Board and may be changed or revised
at any time without a vote of the shareholders of
AmREIT.
o Claims may be brought against AmREIT for the
remediation of environmental conditions, which could
result in substantial expenditures for remediation and
in a loss of revenues during remediation efforts.
o There are risks associated with the acquisition and
development of commercial and industrial properties,
including lease-up and financing risks and the risk
that such properties may not perform as expected. If
such risks materialize, the ability of AmREIT to make
future distributions could be adversely impacted.
o There are risks associated with increased portfolio
size and geographic diversification as a result of the
Merger, including the adequacy of the number of
personnel and the available resources to manage the new
portfolio.
o AmREIT may experience occurrences of uninsured
liability or casualty, reducing AmREIT's capital and
adversely affecting anticipated profits.
o The risks that AmREIT may not be able to timely pay
interest and/or principal due under the Notes.
o AmREIT may incur the expense of compliance with the
Americans With Disabilities Act, fire and safety, and
other regulatory requirements applicable to the
operation of AmREIT's properties.
o AmREIT will be taxed as a corporation if it fails to
qualify as a REIT and AmREIT will be liable for
increased federal, state and local income taxes in such
event.
o Certain provisions in AmREIT's governing documents,
including the right to redeem Shares from a shareholder
if he owns, directly or indirectly, more than 9.8% of
AmREIT's outstanding Shares or to restrict voting and
distribution rights with respect to Shares owned in
excess of such limit, and the Board's right to issue
other classes of equity securities could delay or
prevent changes in control of AmREIT, even if such
changes in control were in the shareholders' best
interest.
-7-
<PAGE>
RISKS An investment in real estate is subject to various risks
ASSOCIATED WITH related to the investment in real estate, including the
GENERAL REAL following.
ESTATE
INVESTMENT o There are risks normally incidental to the ownership
and operation of commercial properties, including,
among others, changes in general national economic or
local market conditions, competition for tenants,
changes in market rental rates, inability to collect
rents from tenants due to bankruptcy or insolvency of
tenants or otherwise, and the need to periodically make
capital improvements.
o There are risks associated with leveraged real estate
investments, such as this inability to meet required
principal and interest payments, the risk that existing
indebtedness will not be refinanced or that the terms
of such refinancing will not be favorable, and the risk
that necessary capital expenditures will not be able to
be financed on favorable terms or at all.
o The illiquidity of real estate investments will limit
AmREIT's ability to vary its portfolio in response to
changes in economic or other conditions.
o Competition from competing properties could inhibit
AmREIT's ability to re- lease its properties and/or
reduce rentals.
o AmREIT's assets are subject to general operating risks
common to all real estate developments, including
increases in operating costs not offset by rental
increases. In addition, AmREIT's assets are primarily
commercial properties, making AmREIT's profitability
dependent upon general trends affecting that type of
real estate investment.
CONSENT PROCEDURES
THE AMREIT The shareholders of AmREIT must vote on the Merger by
CONSENTS completing and timely submitting the AmREIT Consent included
with this Prospectus. The AmREIT Consents will be received,
tabulated and certified as to time of receipt and vote by
The Bank of New York, AmREIT's transfer agent (the "Transfer
Agent"). In order to be counted, an AmREIT Consent must be
received by the Transfer Agent prior to the period
commencing upon the mailing of this Prospectus and the other
solicitation materials (the "Solicitation Materials") and,
unless sooner terminated, ending on the date no later than
(a) ______________, 1998 or (b) such later date as may be
selected by AmREIT (the "AmREIT Solicitation Period"). To
vote on the Merger Shareholders must complete the enclosed
AmREIT Consent and returning it in the enclosed envelope
before the end of the AmREIT Solicitation Period to the
Transfer Agent at 101 Barclay Street, New York, N.Y. 10286:
Attention AmREIT Consents, or by faxing their AmREIT Consent
to (___) ________. Faxed AmREIT Consents will be accepted
until 5:00 p.m., New York time, on the last day of the
Solicitation Period. See CONSENT PROCEDURES - The AmREIT
Consents."
-8-
<PAGE>
THE PARTNERSHIP The Limited Partners must vote on the Merger by
CONSENTS completing and timely submitting the Partnership Consent
included with this Prospectus. Partnership Consents will be
received, tabulated and certified as to time of receipt and
voting by C.H.G. Properties, Inc., who will act as
tabulation agent for the Partnerships (the "Partnership
Tabulation Agent"). Limited partners voting "no" to the
Merger will receive Notes in the event their Partnership
participates in the Merger unless they affirmatively elect
to receive Shares. Partners voting for the Merger or
abstaining from voting will receive shares in the event
their Partnership participates in the Merger, unless they
affirmatively elect to receive Notes, subject to the Note
Restriction. In order to be counted, a Partnership Consent
must be received by the Partnership Tabulation Agent prior
to the period (the "Partnership Solicitation Period")
commencing upon the mailing of the Solicitation Materials
and, unless sooner terminated, ending on the date no later
than (a) ______________, 1998 or (b) such later date as may
be selected by the General Partner (the "Partnership
Solicitation Period"). To vote on the Merger a Partner must
complete and mail his or her Partnership Consent to
Bishop-Crown at 11545 West Bernardo Court, Suite 100, San
Diego, California, Attention: AAA Partnership Consents, or
by faxing the enclosed Partnership Consent to (___)
________. Faxed Partnership Consents will be accepted until
5:00 p.m. California time, on __________, 1998 . See
"CONSENT PROCEDURES - The Partnership Consents."
RECORD DATE; VOTES REQUIRED; INVESTOR LISTS
AMREIT Only holders of Shares of record at the close of business
on________________ (the "Record Date") will be entitled to
vote on the Merger. The Merger Agreement and the issuance of
Shares thereunder will be approved if the proposal receives
the affirmative vote of a majority of the outstanding Shares
entitled to vote on the Merger. As of the Record Date, there
were 2,374,305 Shares outstanding and entitled to vote. The
members of the Board and executive officers of AmREIT and
their Affiliates beneficially owned, as of the Record Date,
252,250 Shares, which is approximately 10.62% of the
outstanding Shares. Management has agreed to vote their
Shares in favor of the proposal.
Abstentions and broker non-votes (where a nominee holding
Shares for a beneficial owner has not received voting
instructions from the beneficial owner with respect to a
particular matter and does not possess or choose to exercise
the discretionary authority with respect thereto) have the
same effect as a vote against the proposal. See "VOTING
PROCEDURES - The AmREIT Consents."
THE Only Limited Partners of record at the close of business
PARTNERSHIPS on the Record Date will be entitled to notice of and to Vote
on the Merger and the amendment to the Partnership
Agreement. The affirmative vote of (i) the holders of a
majority of the outstanding Units and (ii) the General
Partner are required to approve the Merger and the
Partnership Agreement. The General Partner intends to vote
in favor of the Merger
-9-
<PAGE>
and the Partnership Amendment. As of the Record Date, each
Partnership had the number of Units outstanding shown in the
following table, none of which were owned by the General
Partner or his Affiliates.
<TABLE>
<CAPTION>
ORIGINAL NO. OF UNITS UNITS (%) HELD BY
PARTNERSHIP CAPITAL OUTSTANDING GENERAL PARTNERS
----------- ----------- ------------ -----------------
<S> <C> <C> <C>
FUND III $ 945,000 31.5 None
FUND IV 615,000 20.5 None
FUND V 480,000 16.0 None
FUND VI 300,000 10.0 None
FUND VII 1,125,100 37.503 None
FUND VIII 1,860,000 62.0 None
AAA GDYR 1,335,000 44.5 None
FUND IX 5,390,500 5390.5 None
FUND X 11,453,610 11,453.61 None
FUND XI 7,061,209 7,061.21 None
</TABLE>
- ----------
Abstentions and broker non-votes (where a nominee holding
Units for a beneficial owner has not received voting
instructions from the beneficial owner with respect to a
particular matter and does not possess or choose to exercise
the discretionary authority with respect thereto) will, for
the purposes of the Merger Vote, have the same effect as a
vote against the Merger and the Partnership Amendment. Under
federal, Nebraska and Texas state law, and under the
Partnership Agreements the Limited Partners may obtain a
list of Partners, subject to certain conditions. See "VOTING
PROCEDURES - The Partnership Consents."
DESCRIPTION OF THE MERGER
Pursuant to the Merger Agreement, AmREIT will issue an aggregate of up
to 3,009,735 Shares to the Limited Partners in the Partnerships as
consideration for the assets of the Partnerships that will be transferred to
AmREIT in connection with the Merger. Based upon the value of each
Partnership's real estate assets, as adjusted for the Partnership's known
liabilities ("Net Asset Value"), the Shares were allocated to the Limited
Partners in each Partnership based on a price of $9.34 per share (the Exchange
Price").
CONSIDERATION The following table sets forth the allocation of Shares
among the Partnerships in the Merger. The table also sets
forth the Net Asset Value, Limited Partners' Adjusted
Capital and number of Shares offered to the Limited Partners
per $1,000 of their Adjusted Capital at March 31, 1998.
-10-
<PAGE>
PARTNERSHIP NET ASSET VALUES AND ALLOCATION OF SHARES
<TABLE>
<CAPTION>
PARTNERSHIP L.P.S' ADJUSTED SHARES PER $1,000
NET ASSET VALUE CAPITAL AT TOTAL SHARES OF ADJUSTED CAPITAL
PARTNERSHIP AT 3/31/1998 3/31/1998(1) OFFERED AT 3/31/1998
- ----------- --------------- --------------- ------------ -------------------
<S> <C> <C> <C> <C>
FUND III $ 1,123,621 $ 934,814 120,302 128.69
FUND IV 509,865 615,000 54,589 88.76
FUND V 420,749 460,389 45,048 97.85
FUND VI 285,000 294,733 30,514 103.53
FUND VII 1,039,674 1,125,100 110,201 97.95
FUND VIII 1,824,958 1,853,980 193,438 104.34
AAA GDYR 1,093,085 1,229,090(2) 115,862 94.27
FUND IX 4,937,264 5,390,500 528,615 98.06
FUND X 10,438,594 11,453,610 1,117,623 97.58
FUND XI 6,438,116 7,061,209 689,306 97.62
----------- ----------- -----------
Total $28,110,925 $30,418,425 3,005,498
</TABLE>
(1) Adjusted Capital is calculated in accordance with the respective
Partnership Agreement and means the Limited Partner's aggregate original
capital less distributions constituting a return of Capital or funded from
net proceeds from sale or refinancing of Partnership properties.
(2) Reflects distributions of Net Proceeds from Sale of Property of $105,910.
The following table sets forth the estimated number of shares to be received by
Participating Limited Partners for $1,000 of Adjusted Capital, as defined, at
March 31, 1998 and the value of those shares based on the Exchange Price of
$9.34 and $10.25, the public offering price of the shares in AmREIT's most
recent public offering which terminated on May 31, 1998.
-11-
<PAGE>
CONSIDERATION
(CONT'D.)
SHARE VALUE RECEIVED IN THE MERGER
PER $1,000 OF ADJUSTED CAPITAL
AT MARCH 31, 1998(1)
<TABLE>
<CAPTION>
VALUE AT PERCENT OF VALUE AT PERCENT OF
NO. OF $9.34 ADJUSTED SHARE ADJUSTED
SHARES EXCHANGE CAPITAL AT PRICE OF CAPITAL AT
PARTNERSHIP OFFERED PRICE 3/31/1998 $10.25 3/31/1998
- ----------- ------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
FUND III 128.69 $1,202 120.20% $1,319 131.91%
FUND IV 88.76 829 82.90% 910 90.98%
FUND V 97.85 914 91.39% 1,003 100.29%
FUND VI 103.53 967 96.70% 1,061 106.12%
FUND VII 97.95 915 91.48% 1,004 100.40%
FUND VIII 104.34 975 97.45% 1,069 106.94%
FUND GDYR 94.27 880 88.05% 966 96.62%
FUND IX 98.06 916 91.59% 1,005 100.52%
FUND X 97.58 911 91.14% 1,000 100.02%
FUND XI 97.62 912 91.18% 1,001 100.06%
</TABLE>
NET ASSET Net Asset Values are comprised of two component values, the
VALUES price of each Partnership's properties and the balance for
the Partnership cash and cash equivalents net of its debt as
of the Effective Date (the "Net Cash"). Thus, the estimated
Net Asset Value of each Partnership as described in this
Prospectus is subject to adjustment for its actual Net Cash
as of the Effective Date at the rate of $9.34 per share. The
prices of the Partnership's properties were determined for
each Partnership by negotiation between the General Partner
and the Independent Directors. In negotiating the prices the
parties considered several factors, including the current
and projected net operating income and cash flow,
capitalization rate, market rental rates, lease expirations,
and anticipated capital expenditures for leasing and tenant
improvements for each property. Also, in negotiating the
price of the properties the General Partner and the
Independent Directors consulted with Houlihan and
Bishop-Crown, respectively. See "THE MERGER".
The Shares received by the Limited Partners will not be
listed for trading on any securities exchange. If the
requisite number of Limited Partners of any of the
Partnerships approves the Merger, AmREIT has the right, but
not the obligation, to consummate the Merger with the one
Participating Partnership. Upon the effective date of the
Merger, the Participating Partnerships will cease to exist.
AMENDMENTS TO The general partners of the Partnerships are proposing
PARTNERSHIP the Partnership Amendments which amend the respective
AGREEMENTS Partnership Agreements of a Partnership to authorize the
closing of the transactions contemplated by the Merger
Agreement. Limited Partners voting in favor of the Merger
will be deemed to have voted in favor of each
-12-
<PAGE>
AMENDMENTS TO PARTNERSHIP
AGREEMENTS
(CONT'D.)
of these proposed amendments. Since the vote of the Limited
Partners holding a majority of the Units of a Partnership is
required to approve the proposed amendments, a majority vote
is required to approve the Merger. The proposed amendments
authorize the following: (I) the Merger of each Partnership
with and into AmREIT, whether or not AmREIT would be
regarded as an Affiliate of the General Partner; and (ii)
such other actions as may be necessary under or contemplated
by the Merger Agreement or this Prospectus, irrespective of
any provision in the Partnership Agreement which might
otherwise prohibit such actions. See "THE MERGER -- Proposed
Amendments to Partnership Agreements."
DISSENTERS' RIGHTS
AMREIT Shareholders of AmREIT will not have appraisal rights by
reason of the Merger. Any Shareholder may abstain from or
vote against the Merger.
THE PARTNERS Limited Partners will not have appraisal rights by reason of
the Merger. Limited Partners who vote against the Merger
will receive a Note for their Units unless they elect to
receive Shares. See "THE NOTES" below.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships
among the Partnerships, the General Partner, and AmREIT. Certain of these
conflicts of interest (to the extent not discussed above) are summarized below:
o The General Partner controls the corporate general
partner of each Partnership. The General Partner, Mr.
Taylor, is also Chairman of the Board and Chief
Executive Officer of AmREIT and is also the largest
shareholder of AmREIT, owning on June 5, 1998, 252,250
Shares or approximately 10.62% of the issued and
outstanding Shares. He has the right to acquire
additional Shares upon the consummation of the Merger
under the terms of the recently completed Adviser
Acquisition. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" and "THE REIT - The
Adviser Acquisition." After the Merger, he will own
approximately 10.68% of AmREIT's outstanding Shares in
the event all of the Partnerships participate. The
relationships among the General Partner and AmREIT
involve an inherent conflict of interest in their
structuring the terms and conditions of the Merger.
o Since each Partnership effectively has the same general
partners, the General Partner is not in a position to
independently view the Merger proposal solely from the
perspective of a single Partnership, and may have
advocated certain positions in connection with the
negotiation of the Merger Agreement, the
-13-
<PAGE>
effect of which could have benefitted one of the
Partnerships at the expense of other Partnerships.
ORGANIZATIONAL DIAGRAM
Set forth below is a diagram showing the relationships between the
parties to the Merger.
[INSERT ORGANIZATIONAL CHART HERE]
(1) As of the date of this Prospectus, 1998, the General Partner, as a result
of the Adviser Acquisition, is entitled to receive up to an additional
686,740 Shares provided that, among other things, upon certain minimum
levels of the future issuances by AmREIT of common stock or its equity
equivalent. Upon consummation of the Merger and the issuance of all
3,009,735 shares offered hereby, Mr. Taylor would own (including Shares he
currently owns) at least 612,870 shares which could represent up to 10.68%
of AmREIT's then outstanding Shares. See "AmREIT - The Adviser Acquisition"
and " - Certain Relationships and Related Transactions."
(2) Represents the percentage ownership of Units in the Partnership by the
General Partner and his Affiliates.
- ----------
REASONS FOR THE MERGER AND RECOMMENDATIONS
AmREIT AmREIT's Independent Directors have unanimously approved the
Merger and believe that the terms of the Merger Agreement
are fair from a financial point of view to the shareholders
of AmREIT and in the best interests of AmREIT and its
shareholders. Accordingly, the Independent Directors have
unanimously approved the Merger Agreement and the issuance
of Shares thereunder, and recommend the
-14-
<PAGE>
shareholders vote for approval of the Merger Agreement and
the issuance of Shares thereunder. The following are the
principal reasons why and how the Independent Directors made
such determinations (to which relative weights were not
assigned):
o The Merger should improve AmREIT's operating
performance and profit margins;
o A greater number of Shares in the market will
facilitate AmREIT's ability to list its Shares on a
national exchange and increase opportunity to achieve
liquidity for shareholders;
o AmREIT's becoming a self-managed REIT through the
acquisition of its former Adviser provides it the
ability to more efficiently grow its property portfolio
and to achieve significant economies of scale in its
operations.
o The transfer of the Partnerships' properties to AmREIT
should provide entry into new markets and favorable
positions for future portfolio acquisitions;
o The written fairness opinion of Bishop-Crown Investment
Research, Inc. ("Bishop-Crown"); and
o The belief that AmREIT will have greater opportunities
to grow and achieve significant economies of scale in
its opinions.
In recommending the Merger, the Independent Directors also
considered the following potentially negative aspects of the
Merger:
o Because the Exchange Ratio is fixed, the occurrence of
events favorable to AmREIT prior to consummation of the
Merger could increase the value of the consideration to
be received by the Limited Partners in the Merger;
o Expansion into new regions and new markets with which
AmREIT has little prior experience;
o The significant cost involved in connection with
consummating the Merger;
o The substantial time and effort of AmREIT's management
required to effectuate the Merger, integrate the
business of the Partnerships into AmREIT, and manage
the increased and more diversified property portfolio;
and
o The risk that the anticipated benefits of the Merger
might not be fully realized.
-15-
<PAGE>
AmREIT
(CONT'D.)
The Independent Directors believe that the benefits and
advantages of the Merger far outweigh the negative factors
and risks. See "THE MERGER -- The Independent Directors'
Reasons and Recommendations for the Merger" and "-The
General Partner's Reasons and Recommendations for the
Merger."
The Merger Agreement provides that if only one of the
Partnerships approves the Merger, AmREIT has the right but
not the obligation to consummate the Merger with the
Partnerships approving the Merger. If more than one
Partnership approves the Merger, AmREIT must consummate the
Merger with such Partnership if all of the other conditions
to the Merger have been satisfied.
If the Merger is not consummated for any reason, AmREIT will
continue to execute its strategic objective of acquiring by
development and/or purchase, single and multiple tenant
retail properties. AmREIT will also continue to consider
possible acquisitions of compatible properties in commercial
and frontage retail developments. See "POLICIES WITH RESPECT
TO CERTAIN ACTIVITIES -- Investments in Real Estate or
Interests in Real Estate."
THE The General Partner believes that the terms of the Merger
PARTNERSHIPS Agreement, including the consideration to be received by the
Limited Partners in the Merger, are fair to and in the best
interests of the respective Limited Partners. Accordingly,
the General Partner approved and/or caused the corporate
general partner of each Partnership to approve the Merger
Agreement and recommends that the respective Limited
Partners vote for approval of the Merger Agreement and
amendment of their Partnership Agreement. The following are
the principal reasons why and how the General Partner made
such determination (to which relative weights were not
assigned):
o The condition that the Partnership receive Houlihan
Fairness Opinions that the consideration to be received
by the Limited Partners in connection with the Merger
is fair from a financial point of view to the Limited
Partners;
o The determination that a business strategy of seeking a
strategic combination with a publicly held REIT to take
advantage of the growth in the REIT industry and real
estate markets is preferable to the alternatives of
complete liquidation of the Partnerships, continuation
of the Partnerships or reorganization of the
Partnerships into one REIT or up to 10 separate REITS;
o The economic terms of the Merger, including the General
Partner's belief that the Exchange Ratio is fair.
o The determination that the Net Asset Values represent
fair estimates of the value of the Partnerships' assets
and provide a reasonable basis for allocating Merger
consideration among Participating Partnerships;
o The potential benefits of liquidity from owning Shares
in a publicly held REIT;
-16-
<PAGE>
THE PARTNERSHIPS
(CONT'D.)
o Organization as a single self-managed entity to pursue
real estate investment opportunities;
o The Partnerships are not authorized to raise additional
capital and are therefore unable to take advantage of
attractive investment opportunities in contrast to
AmREIT, which has access to equity and debt capital to
pursue real estate investment opportunities;
o Participation in larger and more diverse investment
portfolio resulting from the Merger;
o Simplified tax administration for Limited Partners
through the elimination of Schedule K-1 reporting;
o The terms and conditions of each Merger Agreement,
including the ability of the General Partner to, under
certain circumstances, respond to and engage in
discussions and negotiations with persons making
unsolicited proposals or inquiries and approve or
recommend such a transaction;
In recommending the Merger, the General Partner also
considered the following potential negative aspects of the
Merger:
o Because the Exchange Ratio is fixed, the occurrence of
events unfavorable to AmREIT prior to consummation of
the Merger could reduce the value of the consideration
to be received by the Limited Partners in the Merger;
o AmREIT's plan to increase its borrowings in order to
fund additional real estate investments upon completion
of the Merger and the risks of such increased leverage;
o The taxable nature of the Merger and the fact that the
Limited Partners will not receive cash from the Merger
(other than cash in lieu of fractional Shares) to pay
any taxes due on any taxable gain.
o The Partnerships' share of the expenses of the Merger,
estimated to total $150,000 which are allocated among
the partnerships based on their respective net Asset
Values and that the General Partner will pay or
reimburse the share of such expenses of Partnerships
not electing to participate in the Merger.
o The uncertainties concerning AmREIT's unspecified
future real estate investments which will be funded
from planned post-Merger borrowings;
o The various conditions to AmREIT's obligation to
consummate the Merger;
-17-
<PAGE>
THE PARTNERSHIPS
(CONT'D.)
o The differences in investment objectives and policies
of AmREIT and the Partnerships;
o The risk that the anticipated benefits of the Merger
may not be realized;
o The risk that the benefits of AmREIT's recently
completed Adviser Acquisition will not be fully
realized;
o The fact that under the terms of the Merger Agreements,
the general partners are prohibited from initiating,
soliciting or encouraging any inquires or the making of
any proposal that constitutes, or that may reasonably
be expected to lead to, a transaction which would
compete with the Merger, except if the General Partner
determines in good faith after consultation with
outside legal counsel that it is required by its
fiduciary obligations to do so; and
o AmREIT's strategy of using borrowings to finance
additional property acquisitions is different from the
no financing structure of the Partnerships.
In the view of the General Partner, the potentially negative
factors considered were not sufficient, either individually
or collectively, to outweigh the possible benefits
considered by the General Partner in his deliberations
relating to the Merger. If the Merger is not consummated for
any reason, the Partnerships will continue to pursue their
business objectives of maximizing the value of their
properties and liquidating such properties prior to the
expiration of their respective finite lives. In addition,
the Partnerships may seek another strategic combination or
pursue other attractive alternatives which may become
available.
THE SHARES
The Shares are part of up to 100,000,000 common shares of $0.01 par
value, AmREIT is authorized to issue (the "Common Shares"). When issued the
Shares will be fully paid and non-assessable. As of the Record Date, AmREIT
has outstanding a total of 2,374,305 Common Shares.
Shares received in the Merger will be freely transferable by the
holders thereof except for those Shares held by holders who may be deemed to be
Affiliates of AmREIT (generally including persons who are officers or directors
of AmREIT or who hold more than 10% of AmREIT's outstanding shares) under
applicable federal securities laws.
THE NOTES
The Limited Partners of each Partnership may elect to receive and
Dissenting Partners, unless they otherwise elect will receive Notes for their
Limited Partner interests in the following amounts based on their Partnership's
NAV at March 31, 1998.
-18-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NOTE
OFFERED PER:
---------------------------
$1000 ORIGINAL PERCENT OF ORIG.
PARTNERSHIP L.P. UNIT INVESTMENT $1000 INVESTMENT
----------- ---------- -------------- ----------------
<S> <C> <C> <C>
Fund III $ 223,411 $1,182 118.21%
Fund IV 92,565 753 75.26%
Fund V 83,548 870 87.03%
Fund VI 56,632 944 94.39%
Fund VII 193,057 858 85.80%
Fund VIII 365,167 982 98.16%
Fund GdYr 214,644 804 80.39%
Fund IX 888,438 824 82.41%
Fund X 1,773,043 774 77.40%
Fund XI 1,089,864 772 77.17%
----------
TOTAL $4,980,370
</TABLE>
The principal amount of Notes offered to the Limited Partners is based
on the value the Limited Partners of each Partnership could reasonably expect
to realize in the event of the orderly liquidation of the properties of their
Partnerships. See "THE MERGER - Allocation of Consideration - the Notes."
Pursuant to the Note Restriction, up to an aggregate of $4,980,370 in
principal amount of Notes may be issued in the event of 100% partnership
participation. The impact of the issuance of the Notes on cash distributions
under various assumptions on a pro forma basis is set forth in "Pro Forma
Financial Information", included with the Prospectus. No secondary market for
the Notes is expected to exist upon consummation of the Merger.
The following is a summary of the terms and conditions of the Notes.
-19-
<PAGE>
Interest Rate: 6.0% per annum from and including the date of original
issuance (on the Closing Date).
Terms of Payable, interest only, quarterly until December 31, 2004,
Payment: when the entire unpaid balance of principal and interest on
the Notes is due and payable.
Prepayment AmREIT may prepay the Notes in full or in part at any time
Rights: and upon 30 days prior written notice, payment of the unpaid
balance of principal and interest due on the date of
redemption.
Conversion to The Notes are convertible into Shares at the election of the
Common Shares: note holder at a price of $11.50 per common share.
Nature of The Notes are general unsecured obligations of AmREIT and
Obligation: payment of the Notes is not guaranteed by any person.
AmREIT The Notes are subject to certain covenants by AmREIT,
Covenants: including the covenant to apply any net cash proceeds
received from its sale or other disposition of the
properties acquired from the Participating Partnerships to
the repayment of the Notes.
Loan Agreement: The Notes will be issued subject to the Loan Agreement
pursuant to which the Holders of the Notes must appoint a
Trustee to exercise certain rights.
THE FAIRNESS OPINIONS
AMREIT BISHOP-CROWN FAIRNESS OPINION. The Independent Directors
received the written opinion of Bishop-Crown Investment
Research, Inc. to the effect that, as of the date of such
opinion, based on Bishop-Crown's review and subject to
certain limitations stated in the opinion, the consideration
to be paid by AmREIT pursuant to the Merger was fair to
AmREIT from a financial point of view.
Bishop-Crown was retained to render the fairness opinion
based upon its reputation as a financial advisory firm with
experience in the valuation of businesses and their
securities in connection with mergers and acquisitions and
for other purposes, and has substantial experience with
respect to REITs and other real estate companies and in
transactions similar to the Merger, and because of
Bishop-Crown's familiarity with AmREIT and its operations.
AmREIT has agreed to pay Bishop-Crown a fee of $37,500,
which is payable regardless of whether the Merger is
consummated, and to indemnify Bishop-Crown against certain
liabilities, including liabilities under federal securities
laws. For additional information concerning Bishop-Crown and
its opinion, see "Fairness Opinions -- Bishop-Crown Fairness
Opinion" and the form of Bishop-Crown's opinion attached
hereto as Annex 4. The opinion of Bishop-Crown should be
read in its entirety with respect to the assumptions made,
matters considered and limits of the reviews undertaken
by Bishop-Crown in rendering its opinion.
THE THE HOULIHAN FAIRNESS OPINIONS. The General Partner has
PARTNERSHIPS solicited and the Merger is conditioned upon receipt of the
Houlihan Fairness Opinions to the effect that, as of the
-20-
<PAGE>
date of such opinion, the aggregate consideration to be
received by the Limited Partners in connection with the
Merger is fair to the Limited Partners of each
Partnership from a financial point of view. The General
Partner retained Houlihan because of Houlihan's experience
in the valuation of businesses and their securities in
connection with mergers and acquisitions, and valuations
for corporate purposes especially with respect to REITs and
other real estate companies. The Partnerships have
collectively agreed to pay Houlihan $85,000 and to reimburse
Houlihan for certain of its out-of-pocket expenses,
regardless of whether the Merger is consummated and to
indemnify Houlihan against certain liabilities, including
liabilities under the federal securities laws. For
additional information concerning Houlihan and its opinions,
see the "The Fairness Opinions" and "-- Houlihan Fairness
Opinion," and the form of Fairness Opinions, dated as of
__________, 1998, attached hereto as Annex 5.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Merger involves numerous federal income tax consequences to the
Limited Partners and the shareholders of AmREIT. For a complete discussion
describing these consequences, see "Material Federal Income Tax Aspects." The
material federal income tax consequences of the Merger include the following:
o The taxable Limited Partners will realize taxable gain
or loss in the Merger (which may be ordinary or capital
in nature), but will not receive cash from the Merger
(other than cash received in lieu of fractional Shares)
to pay any taxes due on any taxable gain. Any gain or
loss will be recognized in the year the Merger is
consummated.
o The amount of gain or loss recognized by a Limited
Partner will be based upon the deemed sale of assets
owned by the respective Partnership and, as applicable,
the extent to which the fair market value of the Shares
distributed to the Limited Partner exceeds the Limited
Partner's adjusted tax basis in his or her Units.
o As a REIT, AmREIT will be entitled to a tax deduction
for distributions made to its shareholders. To continue
to qualify as a REIT, however, AmREIT must satisfy
income, asset and ownership tests imposed by the Code.
Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional
tax on REIT income and reduced or no distributions to
shareholders.
o REIT distributions received by taxable shareholders
should be treated as portfolio income. Such
distributions should not be treated as UBTI to certain
tax-exempt shareholders (subject to certain exceptions
which may be applicable to pension-trusts).
-21-
<PAGE>
Deloitte & Touche LLP ("Deloitte") will deliver as of the Closing Date
of the Merger an opinion which is summarized as follows: (1) AmREIT met the
requirements for qualification and taxation as a REIT under the Code for its
taxable year ended December 31, 1997; (2) AmREIT's diversity of equity
ownership, operations through the date of closing of the Merger and proposed
method of operation for future periods should allow it to qualify as a REIT for
its taxable year ending December 31, 1998; and (3) the consummation of the
Merger will not result in AmREIT's failure to continue to satisfy the
requirements for qualification as a REIT for federal income tax purposes.
Rushall & McGeever, APC, special counsel to AmREIT, will deliver its opinion to
AmREIT that the discussion contained under the caption "Material Federal Income
Tax Consequences" accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. See "MATERIAL FEDERAL
INCOME TAX ASPECTS."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction of all conditions to
consummation of the Merger (see "The Merger -- Conditions to Consummation of
the Merger"), the parties will file articles of merger with the Secretary of
State of the states of Nebraska and Texas. For Nebraska and Texas state law
purposes, the Merger will become effective upon the later of the filing of
articles of merger described above, or at such later time which AmREIT and the
general partners shall have agreed upon and designated in such filings in
accordance with applicable law (the "Effective Time"). For all other purposes,
the Merger will be effective as soon as practical after it has been approved by
the shareholders of AmREIT and the Limited Partners of the respective
Partnership. AmREIT and the Partnerships each has the right, acting
unilaterally so long as it has not willfully and materially breached the Merger
Agreement, to terminate the Merger Agreement should the Merger not be
consummated by the close of business on December 31, 1998. See "THE MERGER --
Extension, Waiver and Amendment; Termination."
MANAGEMENT, OPERATIONS AND HEADQUARTERS AFTER THE MERGER
Following the Merger, the Directors of AmREIT prior to the Merger will
continue to serve as Directors of AmREIT. The executive officers of AmREIT
prior to the Merger will continue to serve as the executive officers of AmREIT
after the Merger.
Following the Merger, the headquarters of AmREIT will continue to be
located in Houston, Texas at the current headquarters of AmREIT.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of AmREIT and the Partnerships to effect
the Merger are subject to the satisfaction of certain conditions (none of which
may be waived), including the following: (i) the Merger Agreement shall have
been approved by the shareholders of AmREIT and the Limited Partners of the
Participating Partnerships; (ii) the California Commissioner of Corporations
shall have found the Merger to be fair, just and equitable after the fairness
hearing; (iii) all other approvals to carry out the transactions contemplated
by the Merger Agreement shall have been obtained; (iv) none of the parties
shall be subject to an order or injunction prohibiting the Merger; and (v) all
material actions by or in respect of or filings with any governmental entity
required for consummation of the Merger shall have been obtained or made.
Consummation of the Merger is also subject to the satisfaction or
waiver of certain other conditions, including, among others: (i) the
representations and warranties in the Merger Agreement of each of the
-22-
<PAGE>
parties shall be true and correct as of the Closing Date; (ii) each party shall
have performed its obligations contained in the Merger Agreement; (iii) from
and after the date of the Merger Agreement there shall not have occurred any
change in the financial condition, business or operations of either party that
would have or would be reasonably likely to have a material adverse effect on
the business, results of operations or financial condition of such party; (iv)
each party shall have received an opinion of counsel; and (v) each party shall
have obtained all consents and waivers from third parties necessary to
consummate the Merger.
If any material conditions to the Merger are waived by the parties,
the parties shall resolicit Consents from the waiving party's shareholders or
Limited Partners, as applicable.
If any one Partnership approves the Merger, AmREIT will, subject to
the terms and conditions of the Merger Agreement, consummate the Merger with
the one Participating Partnership. See "THE MERGER -- Conditions to
Consummation of the Merger."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for by using the purchase method in
accordance with Accounting Principles Board Opinion No. 16. See "THE MERGER --
Anticipated Accounting Treatment."
CONDUCT OF BUSINESS PENDING THE MERGER
Each of AmREIT and the Partnerships has agreed in the Merger Agreement
to operate its business in the ordinary course and to refrain from taking
certain actions relating to the operation of its business pending consummation
of the Merger without the prior approval of the other party, except as
otherwise permitted by the Merger Agreement. See "THE MERGER -- Conduct of
Business Pending the Merger."
MERGER EXPENSES
The Merger Expenses of the Merger, including legal and accounting
fees, and printing and solicitation costs are estimated to total $450,00.
AmREIT's share of the Merger Expenses is (estimated to total $300,000) (the
"AmREIT Expenses"). The AmREIT Expenses will include all Merger costs except
the costs of the Houlihan Fairness Opinions, the Partnerships' accounting
costs (and other miscellaneous costs, if any) which will be allocated the
Partnerships based on their respective net Asset Values (the "Partnership
Expenses"). In addition, each Partnership will bear its own direct Partnership
costs including Partner communications. The General Partner must pay or
reimburse each Partnership not electing to participate in the Merger its
allocated share of the Partnership Expenses.
TERMINATION RIGHTS
The Merger Agreement provides that it may be terminated prior to the
Effective Time, for good reason, as defined. In the event a party so
terminates the Merger Agreement, it may be required to pay the non-terminating
party liquidated damages in a specified amount. In the case of AmREIT, such
liquidated damages are equal to 120% of the Partnerships' Proportionate Share
of the Merger Expenses. In the case of the Partnerships, the liquidated
damages is the Partnerships' Proportionate Share of $500,000. See "THE MERGER
- -- Effect of Termination and Abandonment."
-23-
<PAGE>
COMPARISON OF THE PARTNERSHIPS AND AMREIT
The information below highlights a number of significant differences
between the Partnerships and AmREIT relating, among other things, to form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and
investor rights. These differences are discussed in detail under "Comparison
of Ownership of Units, Shares and Notes." That section of the Prospectus also
includes a summary comparison of the legal rights associated with the ownership
of Units, Shares and Notes.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
LIMITED PARTNERSHIP AMREIT
CHARACTERISTIC (UNITS) (SHARES AND NOTES)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
General Business o Acquiring, owning, operating and o Acquiring, developing, owning,
managing single tenant, commercial operating and self-managing
real estate under long-term net commercial real estate including
lease. multi-tenant properties.
- -------------------------------------------------------------------------------------------------------------
Liquidity and o No established market o Possible future market for shares; no
Transferability o Transfer of Units restricted likely market for Notes
o Shares freely transferable; Notes
freely transferable
- -------------------------------------------------------------------------------------------------------------
Property Portfolio o Known investments o Specified present investments;
o Static investment unspecified future investments
o Limited diversification o Investment flexibility
o No reinvestment, no ability to grow o Greater diversification
o Reinvestment, ability to grow
- -------------------------------------------------------------------------------------------------------------
Borrowing o No ability to borrow o Debt of approximately 50% of real
o Partnerships have no debt estate assets, may borrow funds as
determined by management;
Shareholders subject to the risks
associated with debt, including
increased debt service
and potential for default
- -------------------------------------------------------------------------------------------------------------
Form of Organization o Fund IX and Fund X are Nebraska o Maryland corporation
limited partnerships
o Others are Texas limited partnerships
- -------------------------------------------------------------------------------------------------------------
Duration o 7 to 10 years or more o Perpetual, subject to dissolution by
majority vote of Shareholders
- -------------------------------------------------------------------------------------------------------------
Federal Taxation o Partnership is not subject to federal o As REIT, not subject to federal tax
tax; Partners subject to federal tax on earnings (no deduction for
on allocated share of Partnership dividends); Shareholders subject to
income federal income tax to extent of
dividends paid
- -------------------------------------------------------------------------------------------------------------
State Tax Withholding o Some states require withholding on o No withholding
distributions
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
LIMITED PARTNERSHIP AMREIT
CHARACTERISTIC (UNITS) (SHARES AND NOTES)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
State Tax Filings by o Generally passive income o Generally not required in states in
Investors which properties are owned or solely
because of ownership of Shares or
Notes
- -------------------------------------------------------------------------------------------------------------
Tax Characterization o Generally passive income o Portfolio income
of Income
- -------------------------------------------------------------------------------------------------------------
Tax Reporting o Schedule K-1s o Form 1099-DIV for Shares and Form
1099-INT for Notes
- -------------------------------------------------------------------------------------------------------------
Distributions o Quarterly distributions, subject to o Regular quarterly dividends on
Partnership capital needs and Shares;
contingencies. quarterly interest payments on Notes
- -------------------------------------------------------------------------------------------------------------
Management o Vested in General Partner; Limited o Vested in Board of Directors elected
Partners may remove General Partner annually by Shareholders; no
but must purchase his Partnership requirement to purchase a removed or
interest. non-reelected Director's shares
- -------------------------------------------------------------------------------------------------------------
Related Party o Permitted, subject to restrictions in o Permitted, subject to restrictions in
Transactions Partnership Agreements Governing Documents and review by
non-interested Directors; no
restriction in Notes
- -------------------------------------------------------------------------------------------------------------
Voting o Limited voting rights; one vote per o One vote per Share; Notes have no
Unit; voting rights
- -------------------------------------------------------------------------------------------------------------
Management o Property management fee based on o Salaries and/or other compensation
Compensation gross rental receipts from set by the Board of Directors
properties.
o Administrative fee and/or
reimbursements.
o Distributions based on gross receipts
from operations to General Partner
o Reimbursement of expenses to General
Partner
- -------------------------------------------------------------------------------------------------------------
Expenses o All direct Partnership expenses paid o All direct REIT expenses paid by
by Partnership AmREIT
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
RISK FACTORS
In considering whether to approve the Merger Agreement, AmREIT's
shareholders and the Limited Partners should carefully consider, in addition to
the information included elsewhere in this Prospectus, the following:
-25-
<PAGE>
RISKS ASSOCIATED WITH THE MERGER
POTENTIAL CHANGES IN DISTRIBUTION LEVELS FOR LIMITED PARTNERS. Limited
Partners becoming shareholders of AmREIT may not continue to receive cash
distributions at the same levels that distributions were received from the
Partnerships. AmREIT, in order to qualify as a REIT, is required to distribute
with respect to each taxable year distributions (other than capital gain
distributions) to its shareholders in an aggregate amount at least equal to (I)
the sum of (A) 95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of the net
income (after tax), if any, from foreclosure property, if any, minus (ii) the
sum of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before AmREIT timely files its federal income tax return for such year and if
paid on or before the first regular distribution payment date after such
declaration. To the extent that AmREIT does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if AmREIT should fail to distribute during
each calendar year at least the sum of (I) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. Although AmREIT intends to continue paying
quarterly cash distributions at current levels in the future, there is no
assurance it will be able to do so. Also, given the uncertainties related to
the Merger and AmREIT's business, it is impossible to predict with certainty
the impact of the Merger upon the distributions to Limited Partners who receive
Shares in the Merger.
UNCERTAINTIES AT THE TIME OF VOTING AS TO PARTICIPATION OF PARTNERSHIPS.
Consummation of the Merger is subject to the satisfaction or waiver of certain
conditions, including, among other things, obtaining the requisite approval of
the Limited Partners. If the Limited Partners of more than one of the
Partnerships approve the Merger, AmREIT has the obligation (assuming all other
conditions to consummation of the Merger are satisfied or waived) to consummate
the Merger with each Participating Partnership. If the Limited Partners of only
one of the Partnerships approve the Merger, AmREIT has the right, but not the
obligation, to consummate the Merger with the one Participating Partnership.
The extent to which some of the potential advantages of the Merger will be
realized depends in part upon the size of AmREIT's portfolio and the amount of
its leverage.
Because the identity of the Participating Partnerships cannot be known
prior to the end of the Special Meetings, the resulting portfolio, business,
operations and leverage, among other things, of AmREIT cannot be determined
until such time. Limited Partners, therefore, cannot know at the time of voting
precisely the extent to which the actual level of participation may affect
AmREIT's business and operations. The greater the number of Participating
Partnerships, the more assets AmREIT will acquire, resulting in a larger and
more diversified portfolio, with a greater diversification of operating risks.
Conversely, the fewer the number of Participating Partnerships, the fewer
assets AmREIT will acquire, resulting in a smaller and less diversified
portfolio with less diversification of operating risks. This uncertainty makes
it difficult for the Limited Partners to make an informed decision regarding
the ultimate nature of AmREIT's portfolio and the financial and operating risks
to which its business will be subject.
The following four of the many possible combinations (scenarios) are
presented in order to illustrate the differing levels of assets and leverage
which would result assuming the levels of Partnership
-26-
<PAGE>
participation stated. The amounts are based upon assumptions in the Pro Forma
Financial Information as of March 31, 1998 included in this Prospectus.
<TABLE>
<CAPTION>
100% ACCEPTANCE 100% ACCEPTANCE 50% ACCEPTANCE 50% ACCEPTANCE
(NO NOTES) (MAXIMUM NOTES) (NO NOTES) (MAXIMUM NOTES)
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Total Assets $53,483,880 $53,483,880 $42,114,409 $42,114,409
Total Debt 9,118,884 14,129,850 9,118,884 11,619,867
Shares Outstanding 5,222,572 4,621,148 3,719,012 3,418,300
----------- ----------- ----------- -----------
Leverage Ratio 17.05% 26.40% 21.65% 27.59%
(Debt to Assets)
</TABLE>
As illustrated above, the leverage ratios range from 17.05% in the event
of 100% participation, no notes issued to 27.59% in the event of 50%
participation and the Maximum Notes issued. Total assets range from
$51,843,248 to $33,320,584. As total assets increase, operating risk will
increase due to the larger and more diversified portfolio.
POSSIBLE DISAGREEMENT AS TO PARTNERSHIP VALUATIONS. Limited Partners are
subject to the risk that the Net Asset Values of the Partnerships, which were
negotiated by the common management of the Partnerships and AmREIT, do not
properly reflect the value of each Partnership's assets and, accordingly, the
Partnerships in the aggregate may not have received sufficient Shares
consistent with the actual value of their assets. The allocation of the Net
Asset Values among the Partnerships may result in certain of the Partnerships
receiving more than, and other Partnerships receiving less than, their fair
allocation of the Shares.
CONFLICTS OF INTEREST OF THE GENERAL PARTNER. The General Partner is
also an officer, director and significant shareholder of AmREIT, owning
approximately 10.62% of AmREIT's issued and outstanding Shares. The General
Partner is entitled to receive up to 11,609 shares in connection with part of
the Merger, 4,237 shares in general partner interests and 7,372 shares in
payment of disposition compensation. In addition, the General Partner will be
entitled to receive up to 349,333 shares under the terms of the Adviser
Acquisition. Thus, upon completion of the Merger the General Partner could own
up to approximately 10.68% of AmREIT's outstanding Shares. The General Partner
believes the terms of the Merger are fair to the Limited Partners, and that the
ownership and management relationships did not influence the General Partner in
recommending that the Limited Partners approve the Merger.
LACK OF INDEPENDENT REPRESENTATION FOR EACH PARTNERSHIP. The terms of
the Merger have been negotiated by the General Partner (who is also an
Affiliate of AmREIT) on behalf of the Partnerships and by the Independent
Directors on behalf of AmREIT. Thus, each Partnership was not separately
represented by parties independent of AmREIT in structuring and negotiating the
terms of the Merger. Each of the corporate general partners of the
Partnerships is majority owned and controlled by the General Partner. The
General Partner did not arrange for separate representation for each
Partnership because the General Partner believes that (I) the Houlihan Fairness
Opinions, (ii) the right of Limited Partner's who believe that the applicable
Exchange Ratio does not provide such Limited Partners a number of Shares equal
to the fair value of their Units to receive Notes, (iii) the allocation of
Shares to each Participating Partnership, and (iv) the expected benefits to
Limited Partners from the Merger offset
-27-
<PAGE>
any detriment arising from such conflicts of interest or the absence of an
independent representative. However, had separate representation been arranged
for each Partnership, the terms of the Merger might have been different and
possibly more favorable to the Limited Partners. See "CONFLICTS OF INTEREST."
In addition, if separate representation had been arranged for each Partnership,
issues unique to the value of a given Partnership might have received greater
attention during the structuring of the Merger, and there might have been
adjustments in the Net Asset Value allocated among the Partnerships, thereby
increasing or decreasing the number of Shares allocable to such Partnership.
RISKS ASSOCIATED WITH FUNDAMENTAL CHANGE IN NATURE OF INVESTMENT.
Limited Partners who receive Shares in the Merger will have fundamentally
changed the nature of their investment. These changes include the following:
Infinite Life REIT. While each of the Partnerships was formed as
a finite-life investment, with Limited Partners to receive regular cash
distributions from the Partnership's net operating income and special
distributions upon liquidation of the Partnership's real estate investments,
AmREIT intends to operate for an indefinite period of time and has no specific
plans for the sale of its investments. Further, AmREIT is not expected to make
any special distributions of liquidation proceeds, unless it is required to
make such a distribution to maintain its REIT status. Instead of having
investments liquidated through the liquidation of AmREIT's assets, shareholders
should expect to be able to liquidate their investment in AmREIT only through
the sale in the public market of the Shares, and the amount realized through
the sale of the Shares may not be equal to the amount that would have been
realized by the shareholders through the sale of AmREIT's assets. Shareholders
will thus be subject to the market risks of all public companies, particularly
in that the value of their equity securities may fluctuate from time to time
depending upon general market conditions and AmREIT's future performance.
Fundamental Change in Nature of Investment from Pass-through to
REIT. Limited Partners who become traditional shareholders will have
fundamentally changed the nature of their initial investment from an entity
that is a pass-through entity for federal income tax purposes to an investment
in a REIT, which in general is not a pass-through entity for federal income tax
purposes, with the exception of certain undistributed long-term gains. Such
Limited Partners, as shareholders of AmREIT, will be unable to deduct any
losses realized by AmREIT on their individual federal income tax returns.
AmREIT's Business Objectives Differ from Partnership Business
Objectives. AmREIT has different business objectives than the Partnerships.
While the Partnerships had an objective of capital appreciation, AmREIT intends
to grow not only through capital appreciation, but also through a continuous
program of owning and operating real properties, which may include the selling
of existing properties and the acquisition of additional properties. AmREIT
intends to invest in additional real properties by raising additional capital,
borrowing and reinvesting sales proceeds. Raising additional capital involves
the risk of diluting the existing shareholders' percentage interest in AmREIT,
while borrowing involves the risks associated with leverage. AmREIT plans to
increase its leverage up to approximately 50% of the value of the real property
acquired in the Merger and acquire new property(ies) using such borrowed funds.
Changes in Investment Objectives and Policies. The investment and
financing policies of AmREIT and its policies with respect to all other
activities, including its growth, debt, capitalization, distribution and
operating policies, will be determined, from time to time subject to the Stated
Investment Policies, by AmREIT's Board of Directors. Although the Board has no
present intention to do so, these policies may be amended or revised at any
time and from time to time at the discretion of the Board without
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a vote of the shareholders. See "AMREIT AND ITS BUSINESS--AmREIT's Investment
Objectives." A change in these operating policies could adversely affect
AmREIT's financial condition or results of operations or the market price of
its Shares.
Loss of Rights by Limited Partners. The rights of the Limited
Partners are presently governed by either Nebraska or Texas law and the
Partnership Agreement of each respective Partnership. After consummation of the
Merger, the rights of the holders of Units that are converted into Shares will
be governed by Maryland law, AmREIT's Articles of Incorporation and Bylaws.
Certain differences may reduce certain existing rights of Limited Partners.
Examples of these differences include: (I) the Partnership Agreements of the
Partnerships require the distribution of net cash from operations and the net
proceeds from refinancing of properties, unlike the governing documents of
AmREIT which do not require distributions under similar circumstances, with the
payment of such distribution being subject to the discretion of Independent
Directors and the distribution requirements of the Code relating to maintaining
REIT status; (ii) unlike the Partnership Agreement of each Partnership, which
requires that each Partnership must distribute net proceeds from the sale or
refinancing of properties, AmREIT's governing documents do not contain a
similar requirement and AmREIT currently does not intend to distribute the net
proceeds resulting from the sale or refinancing of properties, but rather to
use such proceeds to acquire additional properties or for working capital
purposes; (iii) Limited Partners expect liquidation of their investment when
the assets of the Partnership are liquidated, unlike shareholders who may
liquidate their investment by trading Shares in the open market rather than
through the liquidation of AmREIT's assets; and (iv) whereas the Partnerships
are not authorized to issue additional equity securities other than the Units,
AmREIT has substantial flexibility to issue additional equity securities and
shareholders, unlike Limited Partners, face the risk of dilution by the
issuance of such securities. See "COMPARISON OF OWNERSHIP OF UNITS, SHARES AND
NOTES."
Less Limitations on Management of AmREIT. Currently, the fees and
other compensation which may be paid by a Partnership to the General Partner
and his Affiliates is limited by its Partnership Agreement. As members of
management of AmREIT, there is no limitation on the salaries or other
compensation which AmREIT may pay these persons so long as such compensation is
fair and reasonable and in the best interests of AmREIT as determined by its
board of directors. Accordingly, the General Partner and his Affiliates may
receive greater compensation over the term of their service to AmREIT than they
would if the Merger were not consummated. See "COMPARISON OF OWNERSHIP OF
UNITS, SHARES AND NOTES" and "AMREIT AND ITS BUSINESS--MANAGEMENT."
THE MERGER IS A TAXABLE EVENT. All taxable Limited Partners who
participate in the Merger will be involved in a taxable transaction resulting
in either taxable income or loss for each Limited Partner. However, no gain or
loss should be currently recognized by tax exempt Partners. The Merger will
result in realization of gain or loss to the Partnership based on the
difference between (I) the sum of the fair market value of Shares deemed
received by the Partnership and the Partnership liabilities assumed by AmREIT,
and (ii) the Partnership's adjusted tax basis in its assets. Each Limited
Partner (except, as discussed below, certain tax-exempt Limited Partners)
generally will recognize his/her allocable share of such gain or loss based
upon his/her respective interest in the Partnership. Additionally, each such
Limited Partner will recognize taxable gain to the extent that the fair market
value of the Shares received by such Limited Partner exceeds such Limited
Partner's adjusted tax basis in his/her Units. Gain or loss recognized by the
Limited Partners will be treated as passive income or loss. Although Limited
Partners should be treated as having disposed of their entire interest in the
Partnership's activity for purposes of "freeing up"
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suspended passive losses from such activity, such results are uncertain. See
"MATERIAL FEDERAL INCOME TAX ASPECTS."
Based on AmREIT's representation that the Partnerships do not hold their
properties for resale in the ordinary course of business, the Merger should not
result in recognition of UBTI by certain tax-exempt Limited Partners that do
not hold their Units as a "dealer" or acquired such interests with
debt-financed proceeds. Certain tax-exempt organizations, however, do not
qualify for such treatment. See "MATERIAL FEDERAL INCOME TAX ASPECTS."
NO CASH DISTRIBUTIONS TO LIMITED PARTNERS. The Merger will result in
taxable income or loss to each Limited Partner. Because the Merger will result
in an exchange of Units for Shares, no Limited Partner will receive cash (other
than cash received in lieu of fractional Shares) in the Merger to pay any taxes
due on any taxable income arising as a result of the Merger. Thus, a Limited
Partner may be required to sell Shares or liquidate other investments in order
to pay the taxes arising from such taxable income.
VALUE OF SHARES. Uncertainty as to the value of the Shares and the prices
at which AmREIT's Shares may trade in the event a regular secondary market for
the Shares is established cannot be predicted with certainty, and there is no
assurance that such Shares would not trade below the Net Asset Value per Share
of AmREIT. See "THE MERGER."
DISPROPORTIONATE EFFECT OF INACCURATE VALUATION. The estimated Net Asset
Values are one of a number of possible reasonable estimates of the fair value
of AmREIT and the Partnerships. Therefore, it is possible that these estimated
values would differ from the actual value which could be realized by the
Limited Partners from a sale of their Partnership's net assets to an unrelated
party in a transaction negotiated at arm's length. In the event these
estimated values of the Partnerships are less than such actual fair value, the
undervaluation would favor AmREIT. Conversely, to the extent the estimated
values are overvaluations of the Partnerships, the Merger would favor the
Partnerships in general and among the Partnerships, those having the longer
real property portfolios.
POSSIBLE UNDISCLOSED LIABILITIES ASSUMED BY AMREIT. At closing, AmREIT
will assume the liabilities of the Participating Partnerships. Any liabilities
of the Partnerships are to be disclosed in the balance sheets prepared prior to
closing and used by the Partnerships to determine the Partnerships' Net Cash as
of the Effective Time. Such balance sheets may, however, not disclose all
liabilities of the Partnerships and, in the case of known but contingent
liabilities, not provide for adequate reserves to satisfy such obligations when
fixed in amount. Undisclosed and/or contingent liabilities might include, among
others, claims for cleanup or remediation of unknown environmental conditions,
tenant or vendor claims for pre-Merger activities, unpaid liabilities
unintentionally omitted from the closing balance sheets, claims for
indemnification by the General Partners and other indemnified parties for
pre-Merger events, and claims for undisclosed title defects.
EXPENSES OF THE MERGER. Expenses associated with a successful Merger are
expected to total approximately $450,000 for all parties. Except for the
costs of the Houlihan Fairness Opinions, the Partnerships' accounting costs
and any certain other costs. The total of these costs to be borne by the
Partnerships is estimated to be $150,000. These costs will be allocated
among the Partnerships based on their relative Net Asset Values. In addition
to each Partnership's allocable share of these Partnership expenses
(a Partnership's "Proportionate Share"), each Partnership will bear its
own direct expenses for Partner communications and correspondence. If a
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Partnership does not elect to participate in the Merger Agreement, the General
Partner must pay or reimburse that Partnership's Proportionate Share.
MAJORITY VOTE BINDS EACH PARTNERSHIP. All Partnerships must approve the
Merger by a vote of the holders of a majority of the Units of each Partnership.
If the Merger is approved, Limited Partners who do not properly deliver their
Partnership Consent and/or voted against the Merger, will have their Units
converted into Shares. The Units of each Partnership held by the General
Partner and his Affiliates will be entitled to vote at the Partnership Special
Meeting. The General Partner and his Affiliates will vote these Units in favor
of the Merger.
PARTICIPATING LIMITED PARTNERS WILL FOREGO THE ALTERNATIVES TO THE
MERGER. There are alternatives to the Merger, such as continuing the
Partnerships as they are, liquidating the Partnerships or merging them into a
newly-formed entity. The benefits of these alternatives are avoiding certain of
the expenses of the Merger and avoiding the risks associated with the Merger of
the Partnerships. Retaining the finite-life feature of the Partnerships would
allow investors to eventually receive liquidation proceeds from the sale of the
Partnerships' properties, and a Limited Partner's share of these sale proceeds
could be higher than the amount realized from a sale of an equivalent number of
the Shares.
TERMINATION PAYMENTS IF MERGER FAILS TO OCCUR. No assurance can be given
that the Merger will be consummated. The Merger Agreement provides for the
payment by a Partnership or by AmREIT of liquidated damages in a specified
amount in the event such party terminates the Merger Agreement under certain
circumstances. The liquidated damages amount in the event a Partnership
terminates the Merger Agreement under such circumstances is its Proportionate
Share of $500,000. The obligation to make such payment may adversely affect
the ability of any of the Partnerships or AmREIT to engage in another
transaction in the event the Merger is not consummated and may have an adverse
impact on the financial condition of AmREIT or the Partnerships incurring such
obligation.
RISKS ASSOCIATED WITH AN INVESTMENT IN AMREIT
LACK OF SIGNIFICANT OPERATING HISTORY AS SELF-MANAGED REIT. While AmREIT
was formed on August 17, 1993 and commenced business in May 1994, it has been
operating as a self-managed REIT only since June 5, 1998. Its operating
history under self-management is, therefore, limited. Executive officers and
the majority of the Directors of AmREIT have had experience in acquiring,
developing, leasing and managing properties, but have only approximately 4
years experience in managing and operating a real estate investment trust.
DISTRIBUTIONS IN EXCESS OF INCOME AND/OR FUNDS FROM OPERATIONS. Although
AmREIT anticipates that it will continue to generate income from operations in
the future based on current growth plans, there can be no assurance to the
Limited Partners that it will be able to do so. Furthermore, in the past,
AmREIT has made distributions to its shareholders in amounts exceeding its
Funds From Operations and net income for the periods to which such
distributions relate.
LIMITATIONS ON LEVERAGE. AmREIT's organizational documents do not
quantitatively limit the amount or percentage of indebtedness AmREIT can incur.
AmREIT could become more highly leveraged, resulting in an increase in debt
service that could adversely affect AmREIT's ability to make distributions to
its shareholders and would result in an increased risk of default on its
obligations. Subject to other existing loan documents, AmREIT may and intends
to borrow funds in the future, through secured and/or
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unsecured credit facilities, to finance its property investments. In the event
such borrowings require balloon payments, the ability of AmREIT to make such
payments will depend upon its ability to sell or refinance its properties for
amounts sufficient to repay such loans. In addition, the payment of debt
service in connection with any borrowings may adversely affect cash flow and
the value of the Shares. Also, AmREIT has agreed as a condition for
registering the sale of its shares under certain state securities laws, not to
incur indebtedness, if after doing so, AmREIT's total indebtedness would exceed
three hundred percent (300%) of AmREIT's Net Assets. The use of borrowed funds
in the purchase of properties is referred to as "Leverage."
At March 31, 1998, AmREIT had a total of $8,918,884 of debt outstanding,
all of which was unsecured. This debt represented approximately 29.08% of
AmREIT's total assets. At March 31, 1998, the Partnerships had no material
debt outstanding. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF AMREIT."
On a post-Merger pro forma basis, AmREIT would have outstanding
approximately $8.9 million of unsecured and/or secured debt would equal
approximately 15.8% of AmREIT's total assets, assuming all of the Partnerships
participate and the maximum amount of Notes are issued. The debt in general
contains cross default and cross collateralization provisions, whereby default
on one would constitute an event of default on the other loans.
Most of AmREIT's current debt is pursuant to a $15,000,000 line of credit
with Compass Bank of Houston, Texas. The terms of this line include a variable
interest rate based on the 30-day LIBOR rate plus 200 basis points. According
to the terms of the line, borrowings mature in one year and, if not repaid,
allow the lender to move such borrowings into a securitized mortgage pool.
AmREIT intends to refinance this borrowing prior to maturity with proceeds from
future permanent financings or equity offerings.
The issuance of debt securities or additional equity interests by AmREIT
will be made at such times and under such terms as the Board determines to be
in the best interests of AmREIT. It is possible that any such issuance may
result in dilution of the equity of the Shareholders. AmREIT will not,
however, issue any debt securities or additional mortgage debt which would
increase the Leverage of AmREIT above specified limits on REIT indebtedness,
and in any event will not issue such securities unless the historical or
substantiated future cash flow of AmREIT, excluding extraordinary items, is
sufficient to cover the interest on the debt securities.
RISKS OF LEVERAGE. Following an acquisition, AmREIT intends to increase
its borrowings by amounts up to approximately 50% of the value of the
properties acquired in the Merger.
The effects of utilizing leverage are to increase the number of
properties that may be acquired with funds available for investment, to
increase the potential for gain, to increase the aggregate amount of
depreciation available to AmREIT and to increase the risk of loss. Also, while
higher leverage should enable AmREIT to acquire a greater number of
investments, AmREIT would need to utilize greater funds to make debt service
payments resulting from such higher leverage, which could result in less funds
available for distributions to the Shareholders. To the extent that AmREIT
uses leverage or increased amounts of leverage in the purchase of its
properties, the potential for gain and risk of loss will be increased
accordingly. If AmREIT defaults on secured indebtedness, the lender may
foreclose, and AmREIT could lose its investment in the property. Mortgage
market conditions and the policies of the Federal Reserve Board may in the
future make it difficult to obtain mortgages on acceptable terms.
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RISK OF ACCELERATION OF MORTGAGE FINANCING. In purchasing properties
subject to financing, AmREIT may obtain financing with "due-on-sale" and/or
"due-on-encumbrance" clauses which, upon future refinancing or sale of the
properties, may cause the maturity date of such mortgage loans to be
accelerated and such financing to become due. In such event, AmREIT may be
required to sell its properties on an all-cash basis, to acquire new financing
in connection with the sale, or to provide seller financing. It is not the
intent of AmREIT to provide seller financing, although it may be necessary or
advisable in certain instances. It is unknown whether the holders of mortgages
encumbering AmREIT's investment properties will require such acceleration or
whether other mortgage financing will be available. Such factors will depend
on the mortgage market and on financial and economic conditions existing at the
time of such sale or refinancing.
RISKS OF BALLOON PAYMENT OBLIGATIONS. AmREIT may seek to acquire
properties which are subject to mortgage loans which have a term of not less
than five (5) years, which provide for the amortization of the entire loan
principal, or a substantial portion thereof, prior to maturity, or which do not
require a balloon payment (i.e., a substantial lump sum principal payment) to
be paid within the anticipated holding period for the property. Nevertheless,
AmREIT may incur borrowing not meeting the foregoing standards if a majority of
the Independent and Disinterested Directors deem it to be in the best interests
of AmREIT. Such mortgages involve greater risks than mortgages whose principal
amount is amortized over the term of the loan, since the ability of AmREIT to
repay the outstanding principal amount at maturity may be dependent upon
AmREIT's ability to obtain adequate refinancing or to sell the property, which
will in turn be dependent upon economic conditions in general and the value of
the underlying properties in particular. There is no assurance that AmREIT
will be able to refinance any such balloon payment mortgages at maturity.
Further, a significant shrinkage in the value of the underlying property could
result in a loss of the property by AmREIT through foreclosure.
If AmREIT is unable to refinance a balloon loan at maturity, it may be
forced to sell the Property securing repayment of the balloon loan (or another
Property), which sale would be affected by economic conditions in general and
possibly by the availability of financing to the purchaser. There is no
assurance that the proceeds of such sale would be sufficient to repay fully the
balloon loan. Any such refinancing or sale may affect the rate of return to
Shareholders and such sale may affect the projected time of disposition of
AmREIT's assets. To the extent that Properties are subject to balloon
mortgages, AmREIT's objective of increasing equity through the reduction of
mortgage debt on such Properties may be more difficult to achieve.
DISTRIBUTIONS AS RETURN OF CAPITAL. If AmREIT generates cash from its
operations and thereafter distributes the cash to its shareholders in the form
of distributions, a portion of those distributions will be deemed to be a
return of capital to the extent the distribution exceeds net income as defined
by generally accepted accounting principles. The return of capital on a GAAP
basis is calculated based on distributions to shareholders in excess of net
income of AmREIT allocated to the shareholders. Non-cash deductions such as
depreciation and amortization generally reduce net income of a REIT below
distributions creating a return of capital. A return of capital will also have
the effect of reducing an investor's tax basis in the investor's Shares.
UNSPECIFIED FUTURE PROPERTIES. AmREIT presently owns interests in 14
properties and has contracted to acquire one additional property under
construction. Upon completion of the Merger, to the extent consummated, AmREIT
intends to finance the acquisition by development and/or purchase additional
properties. Although AmREIT has established certain criteria for evaluating
particular properties to be
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acquired by AmREIT, as well as the tenants of such properties, the specific
properties in which the proceeds of this offering are to be invested have not
been identified as of the date of this Prospectus. Therefore, prospective
Shareholders may have no information as to the identification or location of
specific properties, financing terms or other relevant economic and financial
data affecting the properties AmREIT may acquire from such borrowings and
little information with respect to the financial performance of the existing
properties, which information, if possessed by the prospective Shareholder,
would assist such person in evaluating AmREIT.
PROPOSED FEDERAL TAX LEGISLATION. The President's 1998 fiscal year
budget released on February 2, 1998 contains certain proposals relating to the
federal income taxation of REITs which, if enacted in the form proposed, could
severely restrict and could eliminate entirely certain benefits AmREIT expects
to receive as a result of the Adviser Acquisition and/or its possible other
activities. AmREIT currently provides certain non-AmREIT related services to
others, including certain property management and administration services to
the Partnerships. Income generated from these activities would not qualify as
permissible income for the purposes of the 95% and 75% income tests. Under
current law, if the gross income realized from these activities would not
permit AmREIT to satisfy the requirements of the 95% gross income test, AmREIT
could cause these services and functions to be provided by a corporation of
which AmREIT holds non-voting equity securities entitling it to all or
substantially all of the net after tax income resulting from these activities.
Such income received by AmREIT through dividends would qualify for the 95%
income test. Current federal income tax law, in general, does not restrict the
percent of a class of an issuer's non-voting securities a REIT may own. Thus,
under current law, through the retention of such non-voting stock, AmREIT could
retain most, if not all, of the income net of corporate income tax, generated
by non-REIT business activities. Current law does, however, provide that each
such non-REIT subsidiary cannot represent more than 5% of AmREIT's assets. It
is not anticipated that this limitation will be exceeded. Under the
Administration's proposal, these provisions would be amended to prohibit a REIT
from owning more than 10% of the value of all classes of securities of an
issuer. This proposal, if adopted, would be effective with respect to stock
acquired on or after the date of the first committee action. Should this or a
similar proposal be adopted and applicable to AmREIT's investments in non-REIT
subsidiaries, this avenue of investment would be restricted and/or eliminated
entirely. See "MATERIAL FEDERAL INCOME TAX ASPECTS" below.
FIXED EXPENSES. Interest and required amortization payments on any
outstanding debt of AmREIT as well as certain of AmREIT's operating expenses
must be paid without regard to AmREIT's profitability. In the event AmREIT
does not operate profitably and exhausts its reserves, it may be required to
liquidate certain of its investments to pay its fixed expenses, which could
have an adverse effect on AmREIT's operation.
ANTI-TAKEOVER PROVISIONS. The Articles of Incorporation and Bylaws of
AmREIT, as well as Maryland Corporate Law, contain a number of provisions that
might have the effect of entrenching current management or delaying or
discouraging an unsolicited takeover of AmREIT. These provisions include, among
others, the following: (a) the power of the Board to issue 10,000,000 Preferred
Shares, with such rights and preferences as determined by Independent
Directors; (b) the power of Independent Directors to stop transfers and/or
redeem Shares under the following conditions: from any shareholder who owns,
directly or indirectly, 9.8% or more of the outstanding Shares, from any five
or fewer shareholders who own, directly or indirectly, more than 50% of the
outstanding Shares and from any other shareholder if Independent Directors
otherwise determine in good faith that ownership of the outstanding Shares has
or may become concentrated to an extent that may prevent AmREIT from qualifying
as a REIT under the
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Code; and (c) Directors remain in office unless removed by the shareholders or
if another nominee for Director receives the vote of a majority of the
outstanding Shares, regardless of whether they receive a vote of the majority
of the outstanding Shares at AmREIT's annual meeting. Any Shares transferred
in violation of the restrictions set forth in clause (b) of the preceding
sentence become "Excess Shares," with no voting or distribution rights. AmREIT
has the power to purchase or direct the sale of such Excess Shares, with the
sale proceeds being paid to the former owner.
LIMITED LIABILITY OF DIRECTORS AND POSSIBLE INADEQUACY OF REMEDIES. The
Directors are directors of a Maryland corporation and as such are required to
perform their duties in a manner believed by the Directors to be in the best
interests of AmREIT and with such care, including reasonable inquiry, as an
ordinary prudent person in a like position would use under similar
circumstances. A Director who performs his duties in accordance with the
foregoing standards shall not be liable to AmREIT or any other person for
failure to discharge his obligations as a director. Notwithstanding the
additional responsibilities of Independent Directors, an Independent Director
will not have any greater liability than that of a Director who is not
independent.
Under its Bylaws, AmREIT is required to, under specified conditions,
indemnify its Directors, officers and employees against all liabilities to the
full extent permitted by Maryland law. "AmREIT and Its Business - Security
Ownership of Certain Beneficial Owners and Management." AmREIT may in the
future obtain insurance on behalf of any director or officer in reasonable
amounts against losses arising from tort claims which may be made against them.
CONFLICTS OF INTEREST WITH MANAGEMENT. AmREIT, the Directors, and
Affiliates of the General Partner presently own Shares and may purchase
additional Shares. Accordingly, following completion of the offering,
management and its Affiliates may own a substantial percentage of the total
Shares outstanding. As Shareholders, these persons can be expected to vote
their Shares in a manner intended to benefit themselves. Circumstances may
arise where the interests of these persons as Shareholders may be different
from those of the other Shareholders.
LACK OF GEOGRAPHICAL DIVERSIFICATION. As of the date of this Prospectus,
AmREIT and the Partnerships own properties located in 12 southwest states, and
concentrated in the Dallas and Houston metropolitan areas. AmREIT intends to
make future investments in other geographical areas but there is no assurance
it will do so. If AmREIT's concentration of investments continue to be in a
limited number of states or general geographical areas, it will continue to
have high sensitivity to the substantial risks of adverse changes in the
economic conditions and real estate markets within such states or general
geographical areas. Adverse trends in these economic factors could adversely
affect rental income and appreciation in value of these Properties, which in
turn would materially affect the continued viability and profit potential of
AmREIT.
DISTRIBUTIONS SUBORDINATE TO PAYMENTS ON DEBT. AmREIT has paid regular
quarterly distributions since its organization. Distributions to shareholders
of AmREIT will be subordinate to the prior payment of AmREIT's current debts
and obligations. If AmREIT makes distributions in the future and, for any
reason, AmREIT did not have sufficient funds to pay its current debts and
obligations, distributions to shareholders would be suspended pending the
payment of such debts and obligations.
INVESTMENT COMPANY ACT OF 1940. The Directors intend to conduct the
operation of AmREIT so that it will not be subject to regulation under the
Investment Company Act of 1940. AmREIT may therefore
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have to forego certain investments which could produce a more favorable return.
Should AmREIT fail to qualify for an exemption from registration under the
Investment Company Act of 1940, it would be subject to numerous restrictions
under this Act. A failure to qualify for an exemption under this Act could
have a material adverse affect on the Shareholders.
GENERAL RISKS OF REAL ESTATE INVESTMENTS. Equity real estate investments
are expected to limit the ability of AmREIT to vary its portfolio promptly in
response to changing economic, financial and investment conditions. Such
investments will be subject to risks such as adverse changes in general
economic conditions or local conditions (for example, excessive building
resulting in an oversupply of existing space or a decrease in employment,
reducing the demand for real estate in the area), as well as other factors
affecting real estate values (i.e., rent controls, increasing labor, materials
and energy costs, the attractiveness of the neighborhood, etc.). Equity
investments will also be subject to such risks as adverse changes in interest
rates, the availability of long-term mortgage funds and additional debt
financing, and the ability of AmREIT to provide for adequate maintenance of its
Properties. To the extent that AmREIT utilizes less amounts of debt to acquire
its Properties, the risks relating to interest rates and long-term financing
will be reduced. AmREIT's investments will be in frontage retail properties
and, like all real estate equity investments, will be subject to the risk of
inability to attract or retain tenants and to the risk of a decline in rental
income as a result of adverse changes in the economic conditions, local real
estate markets and other factors. To the extent that AmREIT's rental income is
based on a percentage of gross receipts of retail tenants, its cash flow is
dependent on the retail success achieved by such tenants. Also, certain
expenditures associated with equity investments (principally mortgage payments,
real estate taxes, maintenance and utility costs) are not necessarily decreased
by events adversely affecting AmREIT's income from such investments. Should
such events occur, AmREIT's equity investments could become a burden, and
distributions to Shareholders may be impaired. In the event that mortgage
payments are not met with respect to a Property, AmREIT could sustain a loss on
its equity investment as a result of a foreclosure of mortgages secured by such
Property.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE SHARES
SHARE VALUE. The value of the Shares at the Effective Time of the Merger
may vary significantly from the Exchange Price, the value of the Shares
estimated for the purposes of the Merger as of the date of execution of the
Merger Agreement, the date hereof or the date on which shareholders vote on the
Merger Agreement, due to changes in the business, operations and prospects of
AmREIT, market assessments of the likelihood that the Merger will be
consummated and the timing thereof, general market and economic conditions and
other factors. Also, because the Common Shares are not traded in an
established securities market, the Exchange Price is not based on the value for
the Common Shares established by transactions between willing unrelated buyers
and sellers in a regular secondary market. Neither the Independent Directors
nor the General Partner can predict whether the Shares will trade at a price
lower than the Exchange Price or lower than the value of AmREIT's assets after
the Merger.
Because the Exchange Price is fixed at $9.34 per Share, no provision has
been made to pay additional Shares to Participating Limited Partners if the
value of the Shares on the Effective Date of the Merger is lower than the
Exchange Price or to decrease the number of Shares to be received by
Participating Limited Partners if the value of the Shares is greater than the
Exchange Price on the Effective Date.
FUTURE PUBLIC TRADING PRICES LOWER THAN EXCHANGE PRICE. Further, even if
a secondary market for the Shares is established, there can be no assurance as
to the trading volume or price of the Shares after
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the Merger. Events outside the control of AmREIT which would adversely affect
the market value of AmREIT's assets, as well as the market value of the Shares,
may occur during the period from the date of this Prospectus to the date the
Merger is consummated or thereafter. All of the Shares to be issued to Limited
Partners other than certain Affiliates (Limited Partners holding more than 10%
of the Units in the Partnership) in connection with the Merger will be freely
tradeable. Sales of a substantial number of the Shares by Limited Partners
following the consummation of the Merger, or the perception that such sales
could occur, could adversely affect the market price for the Shares after the
Merger.
ILLIQUIDITY OF SHARES. The Shares currently are illiquid because no
regular public market exists in which they may be readily sold. Thus,
investors may not be able to sell the Shares in the future, or may only be able
to do so at a substantial discount from the Offering Price.
POSSIBLE FUTURE DILUTION. The value of the Shares can be diluted by
reason of poor future acquisitions by AmREIT, devaluation of existing
properties of AmREIT, or the subsequent issuance of more Shares in this and
other or subsequent offerings. Shareholders will be subject to the risk that
their equity interests may be diluted through issuance of additional equity
securities if such securities are issued for less than fair market value.
AmREIT has the right to issue, at the discretion of the Board, Shares other
than those to be issued in the Merger, upon such terms and conditions and at
such prices as the Board may establish. In addition, AmREIT may in the future
issue Preferred Shares that might have priority over the Shares as to
distributions and liquidation proceeds.
EFFECT OF MARKET INTEREST RATES ON PRICE OF THE SHARES. An increase in
market interest rates may lead prospective purchasers of the Shares to demand a
higher anticipated annual yield from future dividends. Such an increase in the
required anticipated dividend yield may adversely affect the market price of
the Shares.
RISK CONSIDERATIONS ASSOCIATED WITH THE NOTES
An investment in the Notes involves substantial risk factors.
Prospective investors are advised to consult their own advisors to review and
evaluate the economic, tax and other consequences of ownership of the Notes.
Such Persons are not to construe the contents of this Prospectus as investment,
legal, accounting or tax advice. See "THE MERGER - Description of the Notes."
Before electing to receive Notes, prospective investors and their advisors
should carefully consider, among other things, the following risk
considerations:
SPECULATIVE INVESTMENT. The Notes should be considered a speculative
investment in that AmREIT's ability to make timely principal and interest
payments thereon will depend on AmREIT's future success.
GENERAL OBLIGATIONS. The Notes will be general obligations of AmREIT.
The Notes will be unsecured obligations, and their payment will not be
guaranteed by any person or entity. There is no limitation on the additional
secured debt which AmREIT may issue in the future. There is no assurance that
the value of AmREIT's assets will be sufficient to provide required payments of
principal and interest on the Notes. The Noteholders would be general
creditors of AmREIT and, as such, their claims against the other assets of
AmREIT would be pari passu with AmREIT's other general creditors.
NOTEHOLDERS' LACK OF RIGHT TO PARTICIPATE IN AMREIT'S PROFITS.
Participating Limited Partners who elect to receive Notes will not hold an
equity interest in AmREIT and therefore will not be able to
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participate in earnings or benefit from increases in the value of the Shares,
if any, except by converting their Notes to Shares.
LACK OF INDENTURE FOR THE NOTES. The Notes will not be issued pursuant
to a trust indenture, although a majority of the Noteholders have the right to
bind all of the Noteholders with respect to certain actions under the Loan
Agreement.
ILLIQUIDITY OF NOTES. It is not anticipated that a regular secondary
market for the Notes will develop, thereby making it difficult for Noteholders
to sell their Notes prior to maturity, or subjecting them to the risk of
selling the Notes at substantial discounts from their outstanding principal
balance to facilitate their sale. Thus, a Noteholder will likely not be able
to liquidate his investment in the event of an emergency, and the Notes may not
be readily acceptable as collateral for loans. Accordingly, purchase of the
Notes must be considered a long-term, illiquid investment. Participating
Limited Partners are likely to receive the full face amount of their Notes only
if they hold the obligations to maturity, which is approximately seven (7)
years after the Closing Date of the Merger. See "THE MERGER - Description of
the Notes."
LACK OF SINKING FUND FOR NOTES. The Notes will not be subject to a
sinking fund. AmREIT will not be required to set aside funds for the
retirement of or to retire the Notes at any time prior to their due date.
RISK OF BANKRUPTCY; CLAIMS OF OTHER CREDITORS. Should AmREIT be in
default under the Notes, it is possible that AmREIT may seek the protection of
the Federal Bankruptcy Courts or protection under state law debtor protection
statutes. Such proceedings would delay and possibly reduce the Noteholders'
return of interest and/or principal on the Notes. In such event, AmREIT's
secured creditors would claim a prior right to AmREIT's assets (securing their
obligations), thus leaving fewer assets to satisfy the claims of the
Noteholders.
LIMITED RECOURSE NOTES. Under the terms of the Notes, the Noteholders
have no right of personal recourse against the officers, directors,
shareholders, employees or agents of AmREIT for payment of principal or
interest, or for attorneys' fees and costs which they, as prevailing parties,
may be entitled to recover.
TRUSTEE AND THE LOAN AGREEMENT. Each Noteholder will be required to
enter into the Loan Agreement, whereby the Noteholders may take actions under
the Note or the Loan Agreement only by a Majority Vote, or through the Trustee,
if one is appointed. Accordingly, the persons holding a simple majority of the
Notes may bind all of the Noteholders with respect to certain matters
concerning the Notes, including the waiver of certain defaults under the Notes
and the Security Agreement. Also, the responsibility and authority of the
Trustee to act on behalf of the Noteholders is largely ministerial in nature
and is greatly limited by the Loan Agreement.
LIMITED LIABILITY/INDEMNIFICATION OF TRUSTEE. Under the terms of the
Loan Agreement, the Trustee will not be liable to the Noteholders for actions
taken in good faith and not involving its willful misconduct in connection with
its authority under the Loan Agreement. Moreover, the Loan Agreement provides
that the Noteholders will jointly and severally indemnify the Trustee against
any loss it may incur as a result of its exercise of its duties and obligations
under the Loan Agreement. See "THE MERGER -- The Loan Agreement."
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COSTS OF TRUSTEE REPRESENTATION. The Loan Agreement provides that AmREIT
will be responsible for the payment of the Trustee's fees and expenses
resulting from a default by AmREIT. Nevertheless, in the event that AmREIT is
in default, it is likely that AmREIT will be either unwilling or unable to pay
such costs. Under such circumstances, the Trustee is likely to require that
the Noteholders advance its fees and costs before the Trustee will take any
action requested by the Noteholders. Any such payments advanced by the
Noteholders will be added to the principal amount of the Notes. However, there
is no assurance that the Noteholders will be able to recover any such payments
from AmREIT. See "THE MERGER -- The Loan Agreement" below.
RETIREMENT/REPLACEMENT OF TRUSTEE. The Loan Agreement provides that the
Trustee, if appointed, may resign or be replaced at any time upon thirty (30)
days' prior notice. In the event the Trustee resigns and/or is replaced, the
Noteholders will be required to find and, by a Majority Vote, appoint a
successor or replacement Trustee. Because the Loan Agreement provides that the
Trustee is the exclusive representative of the Noteholders with respect to the
matters set forth therein, the inability of the Noteholders to appoint a
successor or replacement Trustee could severely limit their ability to pursue
their rights in connection with the Notes. Moreover, while the Loan Agreement
requires AmREIT to pay certain costs and expenses of the Trustee, it is
possible that in the event the Trustee resigns or is replaced by the
Noteholders AmREIT will either be unwilling or unable to satisfy these
obligations. In such event, the successor or replacement Trustee would likely
require the Noteholders to advance such amounts as a condition to its becoming
Trustee. See "THE MERGER -- The Loan Agreement."
USURY LAWS. The payment of interest on the Notes will be subject to
applicable usury law. The General Partner believes the interest on the Notes
is not a usurious rate of interest. However, some uncertainty exists as to the
application of the appropriate usury law to any interest paid under the Notes.
Which state's usury law will be applied will generally depend on a number of
factors, including where the Notes were sold. AmREIT believes the interest on
the Notes will not exceed the applicable usury limitations, and, although usury
laws usually exempt certain types of transactions, there is no assurance that
applicable state usury laws will provide an exemption applicable to the Notes.
Also, transactions which have connections with a number of states, such as may
be the situation with the sale of the Notes, may raise an issue of which
state's usury laws correctly apply. In the event the Notes were determined to
pay a usurious rate of interest, under applicable usury law, the lenders
(Noteholders) would not be entitled to receive interest to the extent of such
usurious rate and may be liable for damages.
ABILITY TO SERVICE NOTES. AmREIT will rely substantially on the success
of its future business operations to generate sufficient funds to timely
service the Notes. While management believes AmREIT's ability to achieve these
future operating results is good, there is no assurance that AmREIT will be
able to do so. AmREIT's future operations budgets are based on a number of
assumptions, both about the economy in general and AmREIT's specific business
operations. In general, budgets assume certain economic projections as to
future inflation and interest rates and revenues from AmREIT's various
businesses, all of which will depend substantially on factors beyond AmREIT's
control. Interest rates and levels of economic activity have been particularly
volatile in recent years, and any significant increase in interest rates or
downturn in the level of economic activity, particularly those relating to the
real estate industry, would materially impair AmREIT's ability to achieve its
budgeted levels of operating income. See "AMREIT PRO FORMA FINANCIAL
STATEMENTS."
SECONDARY MARKET FOR THE SHARES. The Shares will be transferable at the
election of their holders. However, there is currently no public market for
the Shares and if and when AmREIT seeks to list the
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Shares in the future, it intends to list only the Shares and not the Notes.
Therefore, it is not expected that a regular secondary market for the Notes
will exist in the future. One or more broker-dealer firms may make a market in
the Notes or endeavor to match persons desiring to sell the Notes with persons
desiring to purchase them; however, there is no assurance that one or more
broker-dealers will do so. Any commissions or other compensation paid by
buyers or sellers in connection with such transactions must be negotiated on an
individual basis by the buyer or the seller and the broker-dealer firm. To the
extent one or more broker-dealer firms advise AmREIT of the availability of
their services in connection with any of the foregoing, AmREIT will provide
such information to Noteholders upon request. AmREIT will not otherwise
provide any services in this connection with any resale of the Notes. See "THE
MERGER - Description of Notes."
PRIOR CLAIM OF NOTEHOLDERS. The holders of the Notes will have the right
to receive the payment of interest and principal on their Notes prior to the
Shareholders' receiving distributions with respect to their Shares.
Accordingly, should AmREIT dissolve and liquidate, it is possible that the
Noteholders may receive a return of the whole of their investment, while the
Shareholders receive either none or a small portion of their original
investment.
RISKS ASSOCIATED WITH AN INVESTMENT IN REAL ESTATE
EFFECT OF ECONOMIC AND MARKET CONDITIONS. Investments in real estate may
involve a high level of risk. One of the risks of investing in real estate is
the possibility that it will not generate income sufficient to meet operating
expenses or will generate income and capital appreciation, if any, at rates
lower than those anticipated or available through investment in comparable real
estate or other investments. Income from properties and yields from investments
in properties may be affected by many factors, including the type of property
involved, the form of investment, conditions in financial markets,
over-building, a reduction in rental income as the result of the inability to
maintain occupancy levels, adverse changes in applicable tax laws, changes in
general economic conditions, adverse local conditions (such as changes in real
estate zoning laws that may reduce the desirability of real estate in the area)
and acts of God, such as earthquakes or floods. Some or all of the foregoing
conditions may affect the properties.
RENEWAL OF LEASES AND RELETTING OF SPACE. AmREIT will be subject to the
risks that, upon expiration, the leases on its properties may not be renewed,
the space may not be relet or the terms of renewal or reletting (including the
costs of required renovation or concessions to tenants) may be less favorable
than current lease terms. If it is unable to promptly relet or renew the leases
for all or a substantial portion of the space, if the rental rate upon such
renewal or reletting were significantly lower than expected or if its reserves
proved inadequate, then AmREIT's cashflow, FFO and ability to make expected
distributions to its shareholders may be adversely affected.
INVESTMENT ILLIQUIDITY. Real estate investments are relatively illiquid.
Such illiquidity tends to limit the owner's ability to vary its portfolio
promptly in response to changes in economic or other conditions. In addition,
federal income tax provisions applicable to REITs limit a REIT's ability to
sell properties held for fewer than four years, which may affect AmREIT's
ability to sell properties at a time which would be in the best interest of its
Shareholders.
OPERATING RISKS. Properties may be subject to all operating risks common
to real estate developments in general, any or all of which might adversely
affect occupancy or rental rates. In addition, increases in operating costs due
to inflation and other factors may not necessarily be offset by increased
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rents. If operating expenses increase, the local rental market for properties
similar to AmREIT may limit the extent to which rents may be increased to meet
increased expenses without decreasing occupancy rates. If any of the above
occur, AmREIT's ability to make distributions to shareholders could be
adversely affected.
COMPETITION. AmREIT's properties are predominantly located in the South
and Southwest. All of AmREIT's properties are located in areas that include
competing properties. The number of competitive properties in a particular area
could have a material adverse effect on both AmREIT's ability to lease space at
any of its properties or at any newly developed or acquired properties and the
rents charged. AmREIT may be competing with owners, including, but not limited
to, other REITs, insurance companies and pension funds that have greater
resources than AmREIT. There is no dominant competitor in any of AmREIT's
markets.
RISKS IN CONSTRUCTION ON PROPERTIES. AmREIT may on occasion acquire
properties and construct improvement thereon or acquire Property under contract
for development. Investment in such properties to be developed or constructed
is subject to more risks than are investments in fully developed and
constructed properties with operating histories. In connection with the
acquisition of such properties, AmREIT may advance on an unsecured basis, a
portion of the purchase price, either in the form of cash, a conditional letter
of credit or promissory note, or some combination thereof. In the case of any
Property which is not yet completed at the time of purchase, AmREIT will be
dependent upon the seller or lessee to fulfill its obligations, including the
return of advances and the completion of construction. Such party's ability to
carry out its obligations may be affected by financial and other conditions
which are beyond the control of AmREIT.
If AmREIT acquires properties on which improvements are to be constructed
or completed, it will be subject to risks in connection with the ability of the
general contractors and the subcontractors to control the construction costs or
to build in conformity with plans, specifications and timetables. The failure
of a contractor to perform may necessitate legal action by AmREIT to rescind
its construction contract or to compel performance or, under certain
circumstances, to rescind its purchase contract. There can be no assurance
that a rescission of AmREIT's purchase contract will be granted. In the event
it is granted, AmREIT may be compelled to sue for damages. Such legal actions
may result in increased costs to AmREIT. Additionally, the failure of a
contractor to perform may result in increased costs to AmREIT as a result of
foreclosure by the construction lender, or due to the need for AmREIT to
complete the project. Performance may also be affected or delayed by
conditions beyond the contractor's control, such as building restrictions,
clearances and environmental impact studies imposed or caused by governmental
bodies, labor strikes, adverse weather, unavailability of materials or skilled
labor and by financial insolvency of the general contractor or any
subcontractors prior to completion of construction. Such factors can result in
increased costs of a project and corresponding depletion of AmREIT's working
capital and reserves, and in loss of permanent mortgage loan commitments relied
upon as a primary source for repayment of construction costs.
AmREIT may make periodic progress payments to the general contractors of
properties prior to the completion of construction. By making such payments,
AmREIT may incur substantial additional risks, including the possibility that
the developer or contractor receiving such payments may not fully perform the
construction obligations in accordance with the terms of his agreement with
AmREIT and that AmREIT may be unable to enforce the contract or to recover the
progress payments. AmREIT may require a labor and material bond, a completion
bond or performance bond or more than one of the foregoing in order to
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insure performance and reduce risk of loss associated with construction. While
AmREIT intends to use such controls and make disbursements to the builder only
as it deems necessary, there can be no assurance as to whether AmREIT will be
able to implement a particular control in any given transaction and whether any
control adopted will, in fact, limit risk.
RISKS OF PROPERTY LEASED TO A SINGLE TENANT. In leases with single
tenants, the continued viability of the lease will depend directly on the
continued financial viability of one tenant. If the tenant fails and the lease
is terminated, AmREIT would incur a reduction in cash flow from the property
and the value of the property would be decreased. Also, where two or more
properties have the same tenant, or related tenants, the continued viability of
each property would depend directly on the financial viability of a single
tenant. To help mitigate these risks, AmREIT will continue to consider the
creditworthiness and financial strength of the tenants of its properties at the
time they are acquired.
RISKS OF NET LEASES. Net leases frequently provide the tenant greater
discretion in using the leased property than ordinary property leases, such as
the right to freely sublease the property, to make alterations in the leased
premises, and to early termination of the lease under specified circumstances.
Further, net leases are typically for longer lease terms and, thus, there is an
increased risk that any rental increase clauses in future years will fail to
result in fair market rental rates during those years. The original leases on
AmREIT's existing properties are for original terms ranging from 10 to 20
years.
In the event a lease is terminated, there can be no assurance that AmREIT
will be able to lease the property for the rent previously received or would be
able to sell the property without incurring a loss. AmREIT could also
experience delays in enforcing its rights against defaulting tenants. For
example, in the event a defaulting tenant declared bankruptcy, AmREIT would
likely be unable to promptly recover the property from the tenant under the
bankruptcy proceedings and there is no assurance that AmREIT would receive rent
in such proceedings sufficient to cover its expenses with respect to the
property. Moreover, the provisions applicable to real estate investment trusts
in the Internal Revenue Code may restrict AmREIT's ability to deal with a new
tenant after termination of the lease. In the event a tenant does not pay
rent, it is likely AmREIT would not only lose the net cash flow from the
property but also might need to use cash flow generated by other properties to
meet mortgage payments on the defaulted property in order to prevent
foreclosure. Certain prior Programs of Affiliates of AmREIT have experienced
adverse business developments, including the filing by tenants for protection
from creditors under Chapter 11 of the Bankruptcy Code and involvement in
litigation, as a result of which AmREIT has released the properties formerly
occupied by such tenants.
In evaluating a possible investment by AmREIT, the creditworthiness, or
financial strength, of a tenant generally will continue to be a more
significant factor than the value of the Property without a lease with the
tenant and the Appraised Value of a Property will probably reflect the value of
the tenant's ongoing lease of such Property.
RISKS OF JOINT VENTURES. AmREIT may participate in joint ventures. It
presently is involved in four such joint ventures with certain of the
Partnerships in which it holds a 51%, 54.84%, 51.9% and 51% interest,
respectively. Investments in joint ventures may involve risks which may not
otherwise be present where investments are made directly by AmREIT in real
property. These risks include those associated with the ability of AmREIT's
joint venture partner to perform, risks that the joint venture partner may from
time to time have economic or business interests or goals which are
inconsistent with or adverse to those of AmREIT and risks where the joint
venture partner may take actions contrary to the requests or
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instructions of AmREIT or contrary to AmREIT's objectives or policies. For
instance, actions by one joint venturer may result in the Property being
subjected to liabilities in excess of those contemplated by the terms of the
joint venture agreement, thereby exposing AmREIT to liabilities of the joint
venture in excess of its proportionate share of such liabilities or may have
other adverse consequences to AmREIT. Moreover, there is the additional risk
that the joint venturers may not be able to agree on matters relating to the
Property they jointly own. Although each joint owner will have a right of
first refusal to purchase the other owner's interest, in the event a sale is
desired, the joint owner may not have sufficient resources to exercise such
right of first refusal.
AmREIT also may from time to time participate jointly with other
investors, including, possibly investment programs or other entities affiliated
with management, in investments as tenants-in-common or in some other joint
venture arrangement. The risks of such joint ownership may be similar to those
mentioned above for joint ventures and, in the case of a tenancy-in-common,
each co-tenant normally has the right, if an unresolvable dispute arises, to
seek partition of the Property, which partition might decrease the value of
each portion of the divided Property.
NO ASSURANCE OF PROPERTY APPRECIATION, REIT PROFIT OR DIVIDENDS. While
AmREIT will attempt to buy leased, income-producing properties at a price at or
below the appraised value of such properties, there is no assurance that any
properties acquired by AmREIT will operate at a profit, will appreciate in
value or will ever be sold at a profit, or that dividends will be paid by
AmREIT. The marketability and value of any such properties will be dependent
upon many factors beyond the control of AmREIT. There is no assurance that
there will be a ready market for AmREIT's properties.
RISKS OF INVESTING IN SPECIAL PURPOSE PROPERTIES. AmREIT may acquire
properties which are specifically suited to the needs of particular tenants,
including retail or commercial facilities. For example, AmREIT already owns
interest in a medical clinic building, two branch bank buildings, a Property on
which a fast-food restaurant is situated, two properties on each of which music
retail stores are operated, and three properties on which large retail shoe
stores are operated. The value of these properties would be adversely affected
by the failure of the specific tenant for which they are suited to renew or
honor its lease. Such properties would typically require extensive renovations
to adapt them for new uses by new tenants. Also, it may be difficult for
AmREIT to sell special purpose properties to persons other than the tenant.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and
local environmental laws, ordinances and regulations, an owner or operator of
real estate may become liable for the costs of removal or remediation of
certain hazardous substances released on or in its property. Such laws
typically impose cleanup responsibility and liability without regard to whether
the owner knew of or was responsible for the presence of the contaminants. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
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Neither AmREIT nor any Partnership has been notified of the possible
existence of any contamination on any of their properties.
Certain federal, state and local laws, regulation and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of building
remodeling, renovation or demolition. Such laws may impose liability for
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real estate for personal injuries associated with ACMs. In
connection with its ownership, management and operation of its properties,
AmREIT may be potentially liable for such costs. Neither AmREIT nor any
Partnership has been notified by any governmental authority or any other third
party of any noncompliance, liability or other claim in connection with any of
its properties.
AmREIT's management believes that its properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products.
AmREIT has not been notified and is not otherwise aware of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of its properties.
AmREIT may not always obtain its own environmental inspection of the
Partnerships' properties. Based on management's previous inspections, general
familiarity with the Partnerships' properties and its knowledge of the area,
management believes that the properties are in compliance in all material
respects with all applicable federal, state and local ordinances and
regulations regarding hazardous or toxic substances. Nevertheless, there is no
assurance or guarantee that hazardous or toxic substances will not later be
found on a property or that a property will not subsequently be found in
violation of any federal, state or local environmental law or regulation.
AmREIT may find it difficult or impossible to sell a property prior to or
following any such cleanup. If such substances are discovered after AmREIT
sells a property, AmREIT could be liable to the purchaser thereof if AmREIT
knew or had reason to know that such substances or sources existed. In such
case, AmREIT could also be subject to the costs described above.
RISKS OF COST IN COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT.
Title III of the Americans with Disabilities Act of 1990 ("ADA"), 42 U.S.C.
Sect. 12101, et seq., prohibits discrimination in the private ownership and
operation of real estate. Title III addresses the design, construction, and
use of places of public accommodation and commercial facilities by private
entities. In general, Title III provides that private entities who own,
operate, lease, or lease to a place of public accommodation cannot discriminate
against persons with disabilities in the facility itself or the activities and
operations conducted within the facility. Title III mandates that persons with
disabilities be provided accommodations and access equal to, or similar to,
that available to the general public. In order to ensure that AmREIT's
properties comply with the ADA, AmREIT may incur costs necessary to remove
"architectural barriers," that is, everything that prevents a person with a
disability from enjoying full and equal use of a facility. These costs may be
prohibitive in certain situations and thereby prevent AmREIT from acquiring a
Property that would otherwise qualify for acquisition. In addition, the costs
of compliance with the ADA may have a significant adverse impact on AmREIT's
profits.
Additional and future legislation may impose other burdens or
restrictions on owners with respect to access by disabled persons. The ultimate
costs of complying with the ADA and other similar legislation
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are not currently ascertainable and, while such costs are not expected to have
a material adverse effect on AmREIT, such costs could be substantial.
Limitations or restrictions on the completion of certain renovations may limit
application of AmREIT's investment strategy in certain instances or reduce
overall returns on AmREIT's investments.
RISKS IN PROVIDING FINANCING TO PURCHASERS OF REIT PROPERTIES. AmREIT
may provide financing to purchasers of its properties in order to effect their
sale. This financing would result in a delay of AmREIT's receipt of the
proceeds from the sale of the Property and in essence would result in AmREIT's
investing in a loan to such person. AmREIT may provide such financing in
circumstances where lenders are not willing to make loans secured by commercial
real estate or may find it desirable where a purchaser is willing to pay a
higher price for the property than it would without such financing.
RISKS OF LEASEBACK TRANSACTIONS. AmREIT, on occasion, may lease an
investment Property back to the seller for a certain period of time or until
stated rental income objectives are obtained. When the seller/lessee leases
space to tenants, the seller/lessee's ability to meet its mortgage payments and
its rental obligations to AmREIT would be subject to the risk that the tenants
may be unable to meet their lease payments to the seller/lessee. A default by
the seller/lessee or other premature termination of the leaseback agreement
could, depending on the size of the Property and AmREIT's ability to manage and
release it successfully, have an adverse effect on the financial position of
AmREIT, since AmREIT may suffer a loss from operation of such Property. In the
event of such a default or termination, there is no assurance that AmREIT would
be able to find new tenants for the Property without incurring a loss.
Also, a seller, in negotiating the terms of an acquisition which will
require the seller to lease the Property back for some period of time, may
attempt to include in the acquisition price all or some portion of the lease
payments required to be made under the lease. If the seller is successful in
such attempt, AmREIT may pay an increased price upon acquisition where a
leaseback is involved. Further, leaseback revenues from properties leased back
to sellers may be deemed to be a return of capital rather than investment
income.
ACCOUNTING FOR NET LEASE TRANSACTIONS. Certain accounting standards
require leases to be classified for financial reporting purposes as either
capital leases or operating leases. Capital leases are required to appear as
assets and liabilities on the lessee's balance sheet. Transactions in which
AmREIT acquires a deed to a Property may or may not be recognized as a sale for
financial reporting purposes due to the inclusion of certain provisions in the
lease of the property. These accounting standards might make sale-leaseback
transactions less desirable for the seller-tenant that wants to treat the
sale-leaseback with AmREIT as an operating lease and, therefore, might reduce
the prospective number of properties available for net lease investment.
RISKS OF ENERGY SHORTAGES AND ALLOCATIONS. There may be shortages or
increased costs of fuel, natural gas, water, or electric power or allocations
thereof by suppliers or governmental regulatory bodies in the areas where
AmREIT purchases properties, in which event the operation of properties to be
acquired by AmREIT may be adversely affected. AmREIT will endeavor, where
feasible, to provide for the pass-through of any such increases to tenants of
the properties through lease provisions to that effect.
COMPETITION FOR INVESTMENTS. The results of REIT operations will depend
upon the availability of suitable opportunities for investment, which in turn
depends to a large extent on the type of investment involved, the condition of
the money market, the nature and geographical location of the property,
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competition and other factors, none of which can be predicted with certainty.
AmREIT will continue to compete for acceptable investments with other financial
institutions, including insurance companies, pension funds and other
institutions, real estate investment trusts and limited partnerships which have
investment objectives similar to those of AmREIT. Many of these competitors
have greater resources than AmREIT and have greater experience than the
Directors and AmREIT.
UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF
PROPERTY. AmREIT carries comprehensive liability, fire, flood, extended
coverage and rental loss insurance with respect to its properties and its
management believes such coverage is of the type and amount customarily
obtained for or by an owner of real property assets similar to AmREIT's real
property assets. Similar coverage will be obtained for properties acquired in
the future. However, there are certain types of losses, generally of a
catastrophic nature, such as losses from floods or earthquakes, that may be
uninsurable or not economically insurable. AmREIT's management exercises its
discretion in determining amounts, coverage limits and deductibility provisions
of insurance, with a view to maintaining appropriate insurance on AmREIT's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that in the event of a substantial loss would not be
sufficient to pay the full current market value or current replacement cost of
AmREIT's lost investment. Inflation, changes in building codes and ordinances,
environmental considerations and other factors also might make it infeasible to
use insurance proceeds to replace the property after such property has been
damaged or destroyed.
ADJACENT PROPERTIES. Although it is not expected to occur, if AmREIT or
its Affiliates acquire properties that are adjacent to other of AmREIT's
properties, the value of such properties acquired by AmREIT or its Affiliates
may be enhanced by the adjacent interests of AmREIT. It is also possible that
such newly acquired properties would be in competition with AmREIT's adjacent
properties for prospective tenants. RISKS ASSOCIATED WITH FEDERAL INCOME
TAXATION OF AMREIT
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. AmREIT believes
that it has operated so as to qualify as a REIT under the Code since its
formation. Although management of AmREIT believes that it is organized and is
operating in such a manner, no assurance can be given that AmREIT will be able
to continue to operate in a manner so as to qualify or remain so qualified.
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations and the determination of various factual matters
and circumstances not entirely within AmREIT's control. For example, in order
to qualify as a REIT, at least 95% of AmREIT's gross income in any year must be
derived from qualifying sources and AmREIT must make distributions to
shareholders aggregating annually at least 95% of its REIT taxable income
(excluding net capital gains). In addition, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions
will not change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. AmREIT is not aware,
however, of any currently pending tax legislation that would adversely affect
its ability to continue to qualify as a REIT.
For any taxable year that AmREIT fails to qualify as a REIT, it will be
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at corporate rates. In addition, unless entitled to
relief under certain statutory provisions, AmREIT also will be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification is lost. This treatment would reduce the net earnings
available for investment or distribution to shareholders because of the
additional tax liability to AmREIT for the year or years involved. In addition,
distributions no longer would
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qualify for the dividends paid deduction nor would there by any requirement
that such distributions be made. To the extent that distributions to
shareholders would have been made in anticipation of AmREIT's qualifying as a
REIT, AmREIT might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax.
RISKS OF EXCISE TAX AND/OR PENALTIES. A violation of REIT provisions of
the Code and Regulations, even where it does not cause failure to qualify as a
REIT, may result in the imposition on AmREIT of substantial excise taxes, such
as where AmREIT engages in a prohibited transaction or where it is determined
to be a dealer in real property. Because the question of whether such a
violation occurs may depend on the facts and circumstances underlying a given
transaction, it is possible that such violations could inadvertently occur. To
reduce the possibility of an inadvertent violation, the Directors intend to
rely on the advice of legal counsel in situations where they perceive REIT
Provisions to be inconclusive or ambiguous.
CHANGES IN TAX LAWS. The discussions of the federal income tax
considerations of this offering are based on current law, including the Code,
the Regulations, certain administrative interpretations thereof and court
decisions. Future events, such as court decisions, administrative rulings and
interpretations and changes in the tax laws or Regulations, that change or
modify these provisions could result in treatment under the federal income tax
laws for AmREIT and/or the Shareholders that differs materially and adversely
from that described in this Prospectus, both for taxable years arising after
and before such event. There is no assurance that future legislation,
administrative interpretations or court decisions will not be retroactive in
effect.
RISKS FOR IRAS AND INVESTORS SUBJECT TO ERISA. Fiduciaries of a pension,
profit sharing or other employee benefit plan subject to ERISA should consider
whether the investment in Securities of AmREIT satisfies the diversification
requirements of ERISA, whether the investment is prudent in light of possible
limitations on the marketability of the Securities, whether the investment
would be an improper delegation of control over or responsibility for plan
assets and whether such fiduciaries have authority to acquire such Securities
under the appropriate governing instrument and Title I of ERISA. Also,
fiduciaries of an Individual Retirement Account ("IRA") should consider that an
IRA may only make investments that are authorized by the appropriate governing
instrument.
RESTRICTIONS ON PAYMENT OF DIVIDENDS. The terms of the Notes and present
institutional credit arrangements may, in certain circumstances, restrict
AmREIT from paying dividends on its capital stock, to some degree. Moreover,
AmREIT may, in the future, enter into credit arrangements which restrict its
ability to pay dividends on its equity securities. In general, these credit
agreements provide that for as long as there is no default in the payment of
principal or interest or any other default causing the acceleration of
indebtedness, AmREIT will be permitted to pay dividends on its equity
securities. The restrictions on payment of dividends could prevent payment of
dividends on AmREIT's equity securities in the event it were unable to make the
payment of principal or interest as required by such agreements. See "THE
MERGER - Description of The Notes."
RISKS OF DEVELOPMENT AND ACQUISITION ACTIVITIES. AmREIT will incur risks
associated with any development activities it undertakes, including the risks
that (I) occupancy rates and rents at a newly completed project may not be
sufficient to make the project profitable; (ii) financing may not be available
on favorable terms for the project; (iii) construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs; (iv) construction costs of a project may
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exceed original estimates, possibly making the project uneconomical; (v)
zoning, occupancy and other required governmental approvals or authorizations
may not be granted and development costs associated therewith may not be
recovered; and (vi) development opportunities explored by AmREIT may be
abandoned. Acquisitions of properties entail risks that investments will fail
to perform in accordance with expectations and that judgments with respect to
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.
AmREIT anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. There is no assurance that permanent financing for such newly
developed or acquired projects will be available or might be available only on
disadvantageous terms. In addition, the fact that AmREIT must distribute 95% of
its taxable income in order to maintain its qualification as a REIT will limit
the ability of AmREIT to rely upon income from operations or cash flow from
operations to finance new developments or acquisitions. As a result, if
permanent debt or equity financing is not available on acceptable terms to
refinance new developments or acquisitions undertaken without permanent
financing, further development activities or acquisitions might be curtailed or
cash available for distribution might be adversely affected. In the case of an
unsuccessful development or acquisition, AmREIT's loss could exceed its
investment in the project.
THE MERGER
The following discussion describes the material aspects of the Merger and
the terms of the Merger Agreement. The detailed terms of the Merger are
contained in the form of Merger Agreement attached as Annex 1 to this
Prospectus. The following description is qualified in its entirety by reference
to the Merger Agreement, which is incorporated by reference herein. AmREIT's
shareholders and the Limited Partners are urged to read carefully.
BACKGROUND ON THE MERGER
In late 1996, the General Partner began to consider equitable and
material circumstances under which one or more of the Partnerships could be
combined with AmREIT. The General Partner believed a combination of the
Partnerships with AmREIT could, if structured in an equitable and efficient
manner benefit the Limited Partners both by providing them an opportunity to
expand and by diversifying their investment with an opportunity for liquidity.
The General Partner believed such a combination would also benefit AmREIT's
Shareholders by allowing an incremental expansion opportunity to acquire
unleveraged assets for its equity and debt securities and to further increase
its investment portfolio by leveraging those assets.
In early 1997, the General Partner informally discussed AmREIT's possible
acquisition of one or more of the Partnerships with the Independent Directors.
While they generally felt such a transaction would be mutually favorable, they
agreed that the General Partner's position as the controlling person of both
the Partnerships and AmREIT's Adviser created a number of conflicts in
structuring such a transaction. The Independent Directors were particularly
concerned about the General Partner's service contracts with the Partnerships
which would, as a practical matter, continue after their acquisition by AmREIT.
The Independent Directors believed it to be in the best interests of the AmREIT
Shareholders to negotiate the acquisition of the Partnerships only if AmREIT
were self-managed. The Independent Directors informed the General Partner that
for this and other considerations they would entertain a
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proposal to acquire the Adviser. In response, the General Partner informed the
Independent Directors that AmREIT's acquisition of the Adviser would need to be
independent of and in no manner conditioned upon any transactions between
AmREIT and the Partnerships. These conditions being acceptable, negotiations
for the Adviser Acquisition commenced in July 1997 and continued through
December 31, 1997, when the Independent Directors approved the final terms of
the Adviser Acquisition. During January and February 1998, the General Partner
began structuring an offer to the Independent Directors. On February 10, 1998,
the General Partner engaged Houlihan to render the Houlihan Fairness Opinions
as to (I)the fair market value, on a controlling interest basis, of each of the
Partnerships; and (ii) on behalf of the Limited Partners in the aggregate of
each Partnership, an opinion as to the fairness, from a financial point of
view, of the consideration received by the Limited Partners in connection with
the Merger, if and when approved by the parties. In late February, in
anticipation of the General Partner's offer, the Independent Directors engaged
Brooks, Baker & Lange, as special counsel, and Bishop-Crown as their principal
advisers.
On March ___, 1998, the General Partner presented his offer of Merger to
the Independent Directors. The Independent Directors reviewed the proposal
with AmREIT management (other than the General Partner), their financial
adviser, Bishop-Crown and Broocks, Baker & Lange. During the remainder of
March through early April, the Independent Directors further considered the
offer and reviewed information regarding the Partnerships, much of which had
been previously reviewed in connection with the Adviser Acquisition.
In early April, the Independent Directors made a counter proposal to the
General Partner. After further negotiations, the parties agreed in principal
to the Merger terms, receiving final agreement as to price based on their
review of, among other things, the 1997 year end financial statements of the
Partnerships and AmREIT.
Based on this agreement in principal, the Independent Directors and the
General Partner instructed legal counsel to file an application for permit and
request for a fairness hearing under the California Securities Law of 1968 (the
"California Application"), which counsel filed with the California Department
of Corporations on April 8, 1998.
During the remainder of April and continuing through May 1998, the
Independent Directors received and reviewed financial information regarding the
Partnerships and advice from Bishop-Crown regarding likely value of the
Partnerships to AmREIT in a controlled acquisition structure. The Independent
Directors and the General Partner considered pro forma financial data based on
various merger scenarios. During meetings on May 21, 22 and 23, 1998, the
Independent Directors and the General Partner reached agreement on the price
and terms of the Partnership Mergers. At a meeting held on ___________, 1998
the Independent Directors, acting as a majority of the Board of Directors,
approved the Agreement of Merger between AmREIT and the Partnerships, directed
counsel to amend the California Application to reflect the final terms of the
Merger Offer and to prepare and file preliminary merger material for the
Merger, as required under the Securities and Exchange Act of 1934 and directed
Bishop-Crown to prepare its opinion on behalf of AmREIT that the Merger is
fair, from a financial point of view, to AmREIT and its Shareholders.
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THE INDEPENDENT DIRECTORS' REASONS AND RECOMMENDATIONS FOR THE MERGER
The Independent Directors, each of whom is unaffiliated with the General
Partner and the Partnerships, believe that the terms of the Merger Agreement
are fair from a financial point of view to the shareholders of AmREIT and in
the best interests of AmREIT and its shareholders. Accordingly, the Independent
Directors have unanimously approved the Merger Agreement and such issuance of
Shares thereunder, and recommend that the shareholders vote for approval of the
Merger Agreement and such issuance of Shares. As the Independent Directors
determined that it would be in the best interests of the shareholders to
acquire all or any one of the Partnerships, the Independent Directors did not
condition the consummation of each of the Mergers on the consummation of any
other Merger. Nevertheless, the Merger Agreement gives AmREIT the option of not
consummating the Merger if only one of the Partnerships approves the Merger. In
reaching their decision, the Independent Directors considered several factors,
and consulted with AmREIT's management and Bishop-Crown. The principal reasons,
to which relative weights were not assigned, of why and how the Independent
Directors made such determinations are as follows:
(1) The Independent Directors reviewed analyses by management showing
that the Merger should help increase (be accretive to) AmREIT's cash flow and
FFO per Share. FFO is a widely accepted measure of an equity REIT's operating
performance. An increase in cash flow and FFO per Share as a result of the
Merger or any other reason may result in a greater likelihood that
distributions will be made to shareholders. The Independent Directors believe
FFO is an appropriate measure of performance and provides investors with an
understanding of the ability of AmREIT to incur and service debt and make
capital expenditures. FFO should not be considered as an alternative to net
income or other measurements under generally accepted accounting principles as
an indicator of AmREIT's operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity.
(2) The Merger will substantially increase AmREIT's total
capitalization and increase its assets from approximately $27.2 million to
approximately $54.0 million. This increased size affords several benefits.
First, the Merger will increase the number of Shares outstanding, which should
allow AmREIT to sooner establish a regular secondary market for the shares and
result in greater liquidity for holders of the Shares if and when such a market
exists. The Independent Directors believe that institutional investors prefer
larger capitalization companies when making investment decisions due to greater
liquidity, which allows the purchase and sale of larger volumes of Shares
without disrupting the market for such Shares. The Independent Directors also
believe that the credit rating agencies generally favor larger capitalization
companies and view them as being more stable for unsecured debt investors.
Management believes all of these factors increase the attractiveness of AmREIT
to potential investors, and that the Merger should ultimately result in an
improved ability to access favorably priced equity and debt capital.
(3) The Independent Directors believe that the Merger will allow
AmREIT to realize economies of scale by spreading costs over a larger number of
properties, thereby improving AmREIT's profit margin.
(4) As a result of the Merger, AmREIT will acquire the Partnerships'
properties, most of which are located in AmREIT's existing market. The
Independent Directors believe that this should provide for easier assimilation
of these new properties into AmREIT's existing portfolio because AmREIT
currently has the resources to provide the leasing and management services for
the properties formerly owned by the Participating Partnerships.
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(5) Following the Merger, AmREIT will be in the financial position to
improve its access to attractively priced alternative sources of capital by
expanding its geographic diversification and thereby reducing its vulnerability
to recessions in any particular region. The last recession was a "rolling
recession," because it affected the economies of different regions at different
times. For example, the Southwestern United States went into and emerged from
the recession earlier than the Southeast. The Independent Directors believe
that the expansion into new areas should reduce the risk that a regional
economic downturn will affect all of AmREIT's properties simultaneously, thus
smoothing AmREIT's performance through the economic cycles.
(6) The Independent Directors received the Bishop Crown Opinion that
the consideration to be paid by AmREIT pursuant to the Merger is fair, from a
financial point of view, to AmREIT as of the date of such opinion, based upon
and subject to certain matters stated therein.
(7) The Independent Directors received and reviewed presentations
from, and discussions with, certain executive officers of AmREIT and Bishop
Crown regarding the business, real estate assets, financial, accounting and due
diligence with respect to the Partnerships and the terms and conditions of the
Merger Agreement, all of which supported the Merger.
The Independent Directors and management also discussed certain potential
negative factors and risks that could arise or do arise from the Merger. These
potential negative factors and risks include the following:
(a) The Exchange Ratio is fixed. Therefore, if the fair value of
the Shares is higher on the Closing Date of the Merger than the amount of the
Exchange Ratio, the number of Shares to be received by the Limited Partners in
the Participating Partnerships will not be reduced, thereby increasing the
value of the consideration to be received by the Limited Partners in the
Merger. The Independent Directors believe this fact was mitigated by the fact
that the number of Shares to be received by the Limited Partners in the
Participating Partnerships will not be increased if the trading price of the
Shares is lower on the Closing Date of the Merger.
(b) Costs related to the Merger (including legal and accounting
fees, financial advisory fees, printing and other costs) are expected to be
significant.
AmREIT's management will have to devote a great deal of
time and effort to effectuate the Merger.
(d) The Merger will not initially result in a significant
increase in the size and diversification of AmREIT's property portfolio, but
will, to the contrary, further concentrate AmREIT's property investments in the
state of Texas. AmREIT currently has properties in Arizona, Texas, Georgia,
Kansas, Louisiana, Missouri, Delaware and Mississippi. The Merger adds four
additional states: Oklahoma, Colorado, Minnesota and Tennessee. Management
considers each of these to be attractive markets. Based on internally generated
estimates of value, approximately 50% of AmREIT's investment in properties is
currently in Texas. Following the Merger, AmREIT's investment in properties
will continue to be concentrated in the state of Texas; approximately 50% of
AmREIT's property will be outside the state of Texas. The Independent
Directors believe that geographic diversification is necessary in order to
improve AmREIT's access to attractively priced alternative sources of capital.
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THE GENERAL PARTNER'S REASONS AND RECOMMENDATIONS FOR THE MERGER
The General Partner determined that the terms of the Merger Agreement,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the respective Limited
Partners. Accordingly, the General Partner and the board of directors of each
corporate general partner has approved the Merger Agreement and recommend that
the respective Limited Partners vote for approval of the Merger Agreement and
amendment of the respective Partnership Agreements.
The General Partner's fairness determination in the case of each
Partnership was based upon the transaction as a whole, as well as the
combination of less than all Partnerships, because the Exchange Ratio
applicable to each Partnership is based upon that particular Partnership's Net
Asset Value. The General Partner determined that the fairness to Limited
Partners of each Partnership, considered separately, of the Merger Agreement
and the transactions contemplated thereby will therefore not be materially
affected as to any Partnership in the event the Merger is completed in any
combination with fewer than all Partnerships.
The General Partner's assessment of the fairness of the proposed Merger
was based on the review of different alternatives that were available. The
evaluations of the different alternatives included, but were not limited to, a
strategic combination with a publicly owned REIT to take advantage of the
growth of the REIT industry and real estate markets in general, completely
liquidating the Partnerships, continuing the Partnerships through an orderly
liquidation (estimated at up to six years), or reorganizing the Partnerships
into one REIT or up to ten separate REITs. The outcome of these different
alternatives is discussed in more detail below. In the case of each
Partnership, the General Partner believes that a strategic combination with
AmREIT should provide the Limited Partners the most viable option.
In reaching his determination, the General Partner consulted with
Houlihan, and considered several factors as to which relative weights were not
assigned. Following are the material reasons as to why and how the General
Partner and the board of directors of each corporate general partner made their
decision to approve the Merger:
(1) The Merger is conditioned upon receipt by the General Partner
of an opinion of Houlihan that the consideration to be received by the Limited
Partners of each Partnership in connection with the Merger is fair from a
financial point of view to the Partnerships' Limited Partners. Houlihan was
engaged to represent each Partnership and the interests of its Limited Partners,
as a group in connection with its determination as to the fairness of the
consideration to be received by the Limited Partners from a financial point
of view without taking into account the specific financial interest of any
person or group of investors.
(2) Prior to implementing a business strategy of seeking a
strategic combination with a publicly owned REIT to take advantage of the
growth in the REIT industry and real estate markets in general, the General
Partner considered the following alternatives: liquidation of the Partnerships,
continuation of the Partnerships through an orderly liquidation period
(estimated at up to six years) and reorganization of the Partnerships into one
REIT or up to ten separate REITs. In order to determine whether the Merger or
one of its alternatives would be more attractive to the Limited Partners, the
General Partner compared the potential benefits and detriments of the Merger
with the potential benefits and detriments of the alternatives. The General
Partner believes that each of the Merger and its alternatives offers potential
benefits and suffers from potential detriments not possessed by the other
alternatives. Set forth below are the conclusions of the General Partner and
the boards of directors of the corporate general
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partners regarding the comparisons of the Merger to its alternatives and a
detailed discussion of the potential benefits and detriments of each of these
alternatives.
LIQUIDATION
An alternative to the Merger would be liquidating each Partnerships'
assets, distributing the net liquidation proceeds to the general partners and
the Limited Partners in accordance with the Partnership Agreements, and
thereafter dissolving the Partnerships. Through such liquidations, the General
Partner would provide for a final disposition of the investors' interest in the
Partnerships.
BENEFITS OF LIQUIDATION. Any net proceeds realized upon the liquidation
of a Partnership would be utilized by Limited Partners for investment,
business, personal or other purposes. If the Partnerships liquidated their
assets, such assets would be valued through arm's length negotiations between
the Partnerships and the prospective purchasers. Except as described under
"Offers from Third Parties" below, none of the Partnerships has to date
received any unsolicited offers to purchase their properties.
DISADVANTAGES OF LIQUIDATION. Since the Partnerships were organized,
significant changes have taken place in the financial and real estate markets
that have had a material adverse impact upon the value of commercial real
estate. In the 1980s and early 1990s, the United States real estate market
experienced one of the worst real estate cycles in recent history.
Undisciplined flows of capital into the real estate market resulted in a large
increase in supply of product, while simultaneously there occurred an economic
downturn which affected every area of the United States, constraining a
corresponding increase in demand. One of the capital sources, the savings and
loan industry, experienced a crisis which sharply curtailed lending as well as
prompted a large number of property sales, contributing to the oversupply. In
addition, a significant change in tax laws made investment in real estate less
attractive and reduced the pool of prospective real estate buyers. Other
sources of capital such as life insurance companies and pension funds reduced
their investment in real estate as the market became less favorable. All of
these factors, as well as other less apparent ones, contributed to reductions
in the revenue streams and a loss in value in all types of real estate located
across the nation. Many real estate markets have begun to strengthen, and some
value has been regained. However, even in improving markets, liquidation of an
entire portfolio within a short period of time typically produces substandard
valuations and may prevent all Partnerships from maximizing the net proceeds
from a sale of a property which may otherwise be achievable. The General
Partner favors the Merger as a means for permitting Limited Partners to take
advantage of the currently favorable market valuations of publicly traded REITs
relative to the private market valuations of the underlying real estate assets.
LIQUIDATION PROCEDURES. The process for liquidating the Partnerships'
assets is in large measure within the control of the Limited Partners. The
General Partner is not authorized, without notice to or the approval of the
Limited Partners, to sell, refinance or otherwise dispose of all or
substantially all of the Partnerships' assets. Liquidation may be accomplished
through a series of separate transactions with the same or different purchasers
or as a part of a multi-property transaction that might also involve properties
owned by other Partnerships. The General Partner may engage real estate
brokers, investment bankers, financial consultants and others to assist with
the disposition of the Partnerships' assets. These persons may assist with the
identification of prospective purchasers, arrangements for asset financing, and
assistance with the structure of the transaction. The General Partner, as a
fiduciary to the Limited Partners, remains responsible for determining the
terms and conditions of the transaction. One of the more significant
considerations for the General Partner would be the decision whether to insist
upon payment in full upon
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sale of a Partnership property or to accept a portion of the sale price at
closing and the balance through installment payments. Acceptance of a sale
proposal providing for deferred payments would extend the life of a Partnership
until receipt of those amounts by the Partnership and their distribution in
accordance with the Partnership Agreement. Such arrangements would also expose
a Partnership to the risk that deferred payments might not be collected in full
and that the Partnership might be forced to foreclose on any collateral given
to secure payment of the deferred obligations.
GENERAL PARTNER'S RECOMMENDATION AND COMPARISON WITH MERGER. The General
Partner favors the Merger over liquidation of the Partnerships' assets based
upon the General Partner's conclusion that the Merger permits Limited Partners
the opportunity to take advantage of the currently favorable market valuations
of publicly traded REITs relative to the private market valuations of the
underlying real estate assets. It is the General Partner's belief that publicly
traded REITs are favorably viewed in the public market in comparison to private
valuations of the underlying real estate assets. The value derived in a
publicly traded REIT is based on the continued growth ability of AmREIT, which
is intended to generate a constant source of cash flow in order to provide
distributions to shareholders. The value of a publicly-traded REIT is measured
on a daily basis as the stock is traded on the stock exchange and is generally
priced at a premium over underlying asset values. The dividend yields of REIT
stocks currently range from 5% to 8%. Real estate assets are typically valued
at 8% to 12% capitalization rates. A publicly-traded REIT allows investors to
invest in real estate with the greater degree of liquidity afforded by an
exchange-listed security. Further, the General Partner believes that the value
to each Limited Partner in an immediate liquidation of each Partnership would
be less than the consideration to be received under the Merger. This is due in
part to the fact that each Partnership would incur selling costs for each
individual property or the portfolio as a whole and the General Partner
believes the sale of multiple assets in a short defined period would likely
result in a discount of the property values from fair market value. An
immediate liquidation would also require legal, accounting and printing costs
to prepare a Proxy or Consent Solicitation Statement requesting an approval
from all Unit holders to approve the liquidation values. The following table
illustrates these alternatives for each Partnership based on its NAV and the
estimated liquidation value of each Partnership based on the General Partner's
estimate of the Orderly Sale Value of the properties of each Partnership.
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<TABLE>
<CAPTION>
ESTIMATED
NET ASSET VALUE LIQUIDATION VALUE
PARTNERSHIP AT 3/31/1998 AT 3/31/1998(1)
----------- --------------- -----------------
<S> <C> <C>
FUND III $ 1,123,621 $ 1,117,057
FUND IV 509,865 462,827
FUND V 420,749 417,741
FUND VI 285,000 283,159
FUND VII 1,039,674 965,286
FUND VIII 1,824,958 1,825,835
AAA GDYR 1,093,085 1,073,222
FUND IX 4,937,264 4,442,188
FUND X 10,438,594 8,865,215
FUND XI 6,438,116 5,449,319
----------- -----------
Total $28,110,925 $24,901,848
</TABLE>
(1) Estimated Liquidation Value equals for each Partnership, its Orderly Sale
Value plus its Net Cash at March 31, 1998.
CONTINUATION OF PARTNERSHIPS
BENEFITS OF CONTINUATION. A second alternative to the Merger would be to
continue each of the Partnerships in accordance with its existing business
plan, with the Partnership remaining as a separate legal entity, with its own
assets and liabilities, and continuing to be governed by its existing
Partnership Agreement. Nothing in the Partnerships' organizational documents
requires the General Partner to proceed with liquidating the Partnership's
assets in today's real estate markets. While the disclosure documents, pursuant
to which the Units were offered to the public, disclosed the intentions of the
Partnerships to liquidate their assets after a maximum of ten to twelve years
from acquisition, depending upon the program, the General Partner is not under
a legal obligation to liquidate assets within that time frame. To the contrary,
each of the Partnerships has an original intended operating life of ten or more
years, and the Limited Partners were advised that the liquidation of the
Partnerships would be in the control of the General Partner. A number of
advantages would be expected to arise from the continued operation of the
Partnerships. Limited Partners should continue to receive regular quarterly
distributions of net cash flow, arising from operations and the eventual sale
of the partnership properties. Since the Partnerships are not obligated to
dispose of their assets at any particular point in time, continuing the
Partnerships allows the General Partner to select the most opportune time for
disposing of the Partnerships' assets, irrespective of the expected holding
period set forth in the original disclosure documents. In addition, the
decision to continue the Partnerships, if selected, would mean that there would
be no change in the nature of the Limited Partners' investment. Continuation
of the Partnerships avoids most disadvantages that might be deemed inherent in
the Merger.
DISADVANTAGES OF CONTINUATION. The primary disadvantage with continuing
the Partnerships is the failure of that strategy to secure the benefits that
the General Partner expects to result from merging the Partnerships' assets
into AmREIT. These benefits are highlighted under "Background and Reasons for
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Merger." The Limited Partners of a Partnership which does not participate in
the Merger should be prepared to continue holding their investments in such
Partnerships for the foreseeable future. For at least some of the Partnerships,
Limited Partners' investments could be held beyond the time period originally
contemplated for the length of those investments. Limited Partners also will
not have the opportunity for liquidity that will be afforded through the
establishment of a secondary market for the Shares. By not participating in
the Merger, Limited Partners could miss the opportunity of taking advantage of
the currently favorable markets for the equity securities of REITs, which
markets today may value real estate assets more favorably than such assets are
valued in the real estate markets themselves. There is no established public
trading market for the Units. The General Partner has not historically
assisted Limited Partners desiring to transfer Units. The purchase price for
the Units in the secondary market is subject to negotiation between the buyer
and seller. Another disadvantage of continuation as a limited partnership is
that Limited Partners would continue to be burdened by the more complicated
Schedule K-1 for the reporting of the financial results of the Partnerships.
GENERAL PARTNER'S RECOMMENDATION AND COMPARISON WITH MERGER. The General
Partner has concluded that continuation of the Partnerships is not as
attractive an alternative as the Merger based on the benefits of the Merger
which Limited Partners would forgo in the event of continuation of the
Partnerships. Specifically, the Limited Partners would not realize the
liquidity or diversification afforded by the Merger, would not benefit from the
currently favorable markets for the equity securities of REITs, which markets
today may value real estate assets more favorably than such assets are valued
in the real estate markets, and would not be able to participate in new real
estate investment opportunities.
Continuing each Partnership in accordance with an orderly liquidation
plan would enable the Partnerships to sell each property at a different time to
maximize price. The downside to this option is that the estimated projected
time frame for a complete liquidation of the Partnerships ranges from an
additional one to six years. This additional time frame would place the
Partnerships in a position that exceeds the originally anticipated holding
period for these real estate investments. During this extended time frame, each
individual investor would remain in an illiquid investment vehicle without the
ability to reasonably exit the investment. Because of the relatively small
total size of each Partnership, the advantages of diversification and liquidity
would not be available. Given the size and number of properties held by each of
the Partnerships, the sale of each individual property would cause each
Partnership to continue to cover fixed administrative charges with the
remaining properties, resulting in future reductions in partnership
distributions. In addition, the Partnership Unit holders would continue to have
the burden of incorporating yearly K-1s with their personal tax returns.
Conversely, AmREIT is expected to have a substantially larger, more
diversified, investment portfolio than any particular Partnership, which
reduces the risks associated with any particular assets or group of assets,
increases AmREIT's ability to access capital markets for new capital
investments and eliminates duplication in administrative services, reporting
and filing.
REORGANIZATION OF PARTNERSHIPS AS ONE REIT OR AS SEPARATE REITS
BENEFITS OF REORGANIZATION. The General Partner considered the
advisability of reorganizing the Partnerships into one or more separate
corporations taxed as a REIT. If approved, such action would have provided some
of the advantages contemplated by the Merger. Such reorganization would be
expected to (i) provide investors in the reorganized entities with some
liquidity; (ii) permit distribution to investors of a simpler federal income
tax Form 1099-DIV (compared to the Schedule K-1); and (iii) potentially be
formed tax-free to the Limited Partners.
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DISADVANTAGES OF REORGANIZATION. The General Partner believes that the
reorganization of the Partnerships into separate REITs has a number of
significant disadvantages. Substantial costs and expenses would be incurred by
a Partnership were it to separately pursue reorganization into a separate REIT.
The General Partner estimates that such costs in the aggregate would
significantly exceed the expected costs for the Merger. Because of the size of
the Partnerships, the General Partner believes such reorganization would result
in a limited market for the shares of the newly formed REITs. While the size
of the combined Partnerships would exceed the size of the current REIT, the
combined Partnerships would be significantly smaller than a post-Merger
combined Partnerships and REIT. Also, a REIT created by combining the
Partnerships would be externally managed unless significant additional expense
(and likely dilution in ownership of the Limited Partners) was incurred by the
Partnerships. For these reasons, the General Partner also believes that
reorganization of all the Partnerships into one REIT would not provide the
portfolio size or diversification or the structure of internal management
necessary to attract growth capital to the new entity. It is unlikely that the
Partnerships, if organized into one or separate REITs, would in the near future
permit a market as broad based and as active as the market that should develop
from the merger of the Partnerships into AmREIT.
GENERAL PARTNER'S RECOMMENDATION AND COMPARISON WITH MERGER. The General
Partner believes that the reorganization of the Partnerships into one REIT or
as separate REITs would present the potential detriments of the Merger without
providing many of its potential benefits, such as the likelihood of the sooner
creation of an active and broad-based market for the REIT's securities,
elimination of conflicts of interest among the various Partnerships, increased
diversification, access to an existing publicly-traded vehicle such as AmREIT
and more immediate growth potential and improved access to the capital markets.
In addition, the General Partner believes that the cost of pursuing the
reorganization would be significantly greater than each Partnership's pro rata
share of the Merger expenses, which expenses will be paid by AmREIT if the
Merger is approved or, in certain circumstances, paid in substantial part by
the General Partner if the Merger is not approved.
The consideration of rolling up the Partnerships into a single REIT was
not attractive as an alternative due to the small size of the ultimate
portfolio. Also, the transaction and REIT formation costs in reorganizing the
Partnerships into one REIT would be significant for each Partnership. The
consideration to have individual REITs was not achievable due to similar
reasons stated for rolling up the ten Partnerships into a single REIT. The
General Partner concluded that the size of the individual REITs would be too
small in the public market to be an attractive investment, therefore making it
a difficult vehicle to generate long-term value and liquidity for the Limited
Partners.
SUMMARY OF POSITIVE AND NEGATIVE FACTORS CONSIDERED BY THE GENERAL PARTNER
Following is a summary of the positive and negative factors considered
by the General Partner in recommending the Merger to the Limited Partners of
each Partnership. After considering each of these factors individually and in
the aggregate, the General Partner strongly recommends that the Limited Partners
vote for the Merger.
o The General Partner believes that the economic terms of the Merger.
Agreement, including the Exchange Ratio for each Partnership and the
55.1% equity interest in the combined AmREIT entity to be received by
the Limited Partners, assuming all Partnerships participate in the
Merger, are favorable to the Limited Partners.
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o The General Partner believes that the Net Asset Values of the
Partnerships represent fair estimates of the value of the Partnership
assets, net of liabilities, as of December 31, 1997, and constitute a
reasonable basis for allocating the consideration offered by AmREIT
among all Partnerships that may be combined through the Merger.
o The General Partner believes that in the future, the combined entity
will have improved access to capital markets for future growth and
Limited Partners will have enhanced liquidity as a result of the
larger total equity market capitalization of the combined entity.
o As separate legal entities with different investors, each of the
Partnerships must segregate its assets and liabilities (to avoid
commingling assets), conduct operations independently, and maintain
separate books and records for the preparation of financial
statements, tax returns, investor information and, as required,
reports and filings to be made to various governmental regulatory
agencies. The assets of one Partnership cannot be employed for the
benefit of one or more of the other Partnerships and the general
partners' fiduciary duties prevent them from pursuing activities
favoring some Partnerships to the disadvantage of other Partnerships.
Due to the separate nature of the Partnerships, with their different
groups of investors, the general partners must always be mindful of
the separate programs, and treat them separately, even if other
courses of action would benefit most if not all of the Partnerships.
Potential conflicts of interest arise in the allocation of management
resources and efforts to refinance or dispose of properties. In
contrast, the Merger places substantially all of the assets of the
Participating Partnerships into AmREIT, and allows such assets to be
used to achieve a common set of investment objectives without taking
into account the differences among the Partnerships. The General
Partner therefore concluded that, through the Merger, AmREIT could
secure advantages that cannot be fully pursued by the Partnerships
acting on their own. Such advantages include, but are not limited to,
the opportunity of making new investments, the availability of
financing and taking advantage of certain business opportunities
(which may not be profitably pursued by any of the Partnerships).
o The General Partner reviewed the terms of the Merger Agreement,
including the mutuality of the representations, warranties and
covenants, the requirement that each party consult with the other on
significant business and financial matters prior to consummation of
the Merger, and the ability of the General Partner to pursue an
unsolicited superior competing transaction should its fiduciary duties
so require, and believes that they were fair to the Limited Partners.
o The General Partner believes that the Merger will result in
simplified tax administration for most Limited Partners. Shareholders
will receive Form 1099-DIV to report their distributions from AmREIT.
Forms 1099-DIV are substantially easier to understand than the more
complicated Schedule K-1 prepared for the reporting of the financial
results of the Partnerships.
o Each year the Partnerships must prepare up to ten separate sets of
financial statements, annual and quarterly filings for the Commission,
tax returns and investor communications. The accurate preparation of
this material requires substantial management time and effort.
Furthermore, to the extent other service providers, such as legal
counsel, accountants, appraisers, land use consultants and other
professionals, render services benefitting two or more of the
Partnerships, relative to the benefits afforded the Partnerships,
costs and expenses
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associated with and services must be fairly and equitably allocated
among the Partnerships. The General Partner therefore believes that,
by combining the Participating Partnerships into a single ownership
entity, the Merger should eliminate much of the duplication in
reporting, filing, and other administrative services, simplifying
administration of the consolidated entities including tax
administration as described below. The General Partner found it
difficult to quantify to what extent, if any, this merger of functions
would reduce the overall cost of administrative services. For example,
while the Merger reduces the number of entities for which
administrative services are required, the Merger will not reduce the
number of investors or the assets under management. The General
Partner concluded that whether or not the Merger reduces the overall
costs, it should eliminate the risk of misallocating expenses
benefitting one or more of the programs, and the problems of
determining a fair method of allocating common costs and expenses, and
simplify the preparation of financial statements, tax returns,
investor information and reports and filings otherwise required.
o The General Partner has seen in recent years a number of significant
changes take place in the financial and real estate markets. These
same factors created attractive investment opportunities for investors
which have access to capital. The General Partner also concluded that
the Partnerships are not in a position to take advantage of these
opportunities since they have already committed their capital and are
not authorized to reinvest proceeds from the sale of their properties
or to raise additional funds. The General Partner believes that, in
contrast, AmREIT can take advantage of investment opportunities that
may be available in current real estate markets because it has both
the right to reinvest net sale or refinancing proceeds and the
authority to raise additional capital, through the sale of debt and/or
equity securities, to finance investments. This ability will allow
those Limited Partners who become shareholders in AmREIT to
participate in investment opportunities in the current real estate
market.
o Moreover, the General Partner further believes that even if the
Partnerships were able to raise additional funds through debt or
equity offerings, AmREIT, as a combined entity, could more easily
issue additional debt and equity securities on more attractive terms
than would be available to any of the Partnerships due to its larger
base of assets and shareholders' equity. If all of the Partnerships
participate in the Merger, AmREIT will control assets having a value
of approximately $54.0 million. The General Partner believes that
AmREIT's capital base may make it a more attractive candidate for the
services of investment banking firms, financial institutions,
institutional lenders and others interested in placing large amounts
of capital. Generally speaking, all other conditions being equal, the
cost of money for large borrowers is less than the cost of money for
borrowers having a smaller capital base.
o By combining the Partnerships with AmREIT, the Merger will create an
investment portfolio substantially larger and more geographically
diversified than the portfolio of any of the Partnerships. The General
Partner therefore concluded that this increased size and the resulting
consolidation of operations would spread the risk of an investment in
AmREIT over a broader group of assets and reduce the dependence of the
investment upon the performance of any particular asset or group of
assets, such as assets in the same geographical area.
In recommending that the Limited Partners vote for the Merger, the
General Partner considered the following potentially negative factors in his
deliberations concerning the Merger:
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o Because the Exchange Ratio for each Partnership is fixed, a decline in
the value of the Shares would reduce the value of the consideration to
be received by Limited Partners in the Merger. This factor was
mitigated, in the General Partner's view, by the fact that because of
the fixed Exchange Ratio, Limited Partners would benefit from any
appreciation in the price of the Shares.
o AmREIT intends to maintain distributions at current levels following
the Merger, if consummated; however, there is no assurance it will be
able to do so or, if made, such distributions will not exceed AmREIT's
net income and/or FFO for the periods to which they relate.
o There are numerous conditions to AmREIT's obligation to consummate the
Merger.
o The anticipated benefits of the Merger may not be realized.
o Under the terms of the Merger Agreement, each of the general partners
is prohibited from initiating, soliciting or encouraging any inquiries
or the making of any proposal that constitutes, or may reasonably be
expected to lead to, a transaction which would compete with the Merger
except that, if the general partner determines in good faith after
consultation with outside legal counsel that it is required by its
fiduciary obligations to do so, the general partner may, among other
things, respond to and engage in discussions and negotiations with
persons making unsolicited proposals or inquiries and may approve or
recommend such a transaction.
o The Partnerships currently have no leverage (borrowings). Upon
completion of the Merger, AmREIT intends to immediately increase its
leverage to levels up to approximately 50% of its total post-Merger
real estate value.
o AmREIT has only recently completed the Adviser Acquisition and the
anticipated benefits therefrom may not be fully realized.
o Each Partnership electing to participate in the Merger is required to
pay its Proportionate Share of the Partnership Expenses estimated to
total $150,000. Also, if a Partnership terminates the Merger Agreement
without good reason, as defined, or under certain other circumstances,
it would be required to pay to AmREIT its Proportionate Share of
liquidated damages of up to $500,000.
o The Merger will result in taxable income or loss to each Limited
Partner. Because the Merger will result in an exchange of Units for
Shares, no Limited Partner will receive cash (other than cash in lieu
of fractional Shares) in the Merger to pay any taxes due on any
taxable income arising as a result of the Merger.
o AmREIT intends to acquire by development and/or purchase one or more
properties with post-Merger financing proceeds, which property(ies)
are currently unidentified.
In light of the wide variety of factors, both positive and negative,
considered by the General Partner, the General Partner found it impracticable
to quantify or otherwise assign relative weights to the specific
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factors considered in making its determination. However, in the General
Partner's view, the potentially negative factors considered by it were not
sufficient, either individually or collectively, to outweigh the positive
factors considered by the General Partner in his deliberations relating to the
Merger. In addition, except as detailed above, no analysis or attempt to
quantify any financial or operational benefits or detriments was made.
THE GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING
THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE RESPECTIVE LIMITED
PARTNERS AND HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE
RESPECTIVE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND
AMENDMENT TO THE PARTNERSHIP AGREEMENTS AND FOR APPROVAL OF THE APPLICABLE
RELATED TRANSACTION.
In the event the Merger is not consummated for any reason, each
Partnership will continue to pursue its business objectives of maximizing the
value of its properties.
OFFERS FROM THIRD PARTIES
The General Partner has not received any offers to purchase any
Partnership properties from unaffiliated third parties during the past twelve
months.
THE NOTES
GENERAL. The Notes are part of a series of up to $5,500,000 in principal
amount of 6.0% Convertible Notes due December 31, 2004, which may be issued
pursuant to the terms of the Loan Agreement. The Notes will be issued as of
the Closing Date and will bear interest from the date of issuance. Elections
to receive Notes in lieu of Shares in the Merger will be accepted on the basis
described elsewhere in this Prospectus. The material terms of the Loan
Agreement are described below, and a copy of the Loan Agreement may be obtained
upon request from AmREIT.
REGISTERED FORM. The Notes will be issued in registered form, without
coupons, in denominations of the exact amount of the investment. Ownership of
the Notes will be documented only on the records of AmREIT, and such
documentation will constitute the sole evidence of ownership. The copies of
the Notes issued to the Noteholders will be facsimiles and will not be
negotiable. Transfers of the Notes will be effective only when evidenced on
the records of AmREIT.
TRANSFERS OF RECORD. The Notes may be transferred only on the records of
AmREIT upon written request to transfer in a form specified by AmREIT, and
delivered to AmREIT at its principal business offices together with the
Noteholder's facsimile copy of the Note. No service charge will be made for
the registration of transfer or exchange of the Note, but AmREIT may require
payment of a sum sufficient to pay any transfer tax or similar governmental
charge payable in connection with a transfer of the Note.
INTEREST AND PRINCIPAL PAYMENTS. Interest will be paid at the rate of
6.0% per annum, uncompounded, from the date of issuance. The Loan Agreement
provides for AmREIT to make payments to the holders of the Notes as follows:
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(1) quarterly installments of accrued interest on the fifth day
of the first calendar quarter following the Closing Date and
on the fifth day of each calendar quarter period thereafter
with respect to interest accrued during the immediately
preceding calendar quarter until the Maturity Date (interest
will be computed on a 365-day year for actual days elapsed);
and
(2) the unpaid balance of principal and accrued interest on the
Maturity Date.
AmREIT will pay principal and interest by check, and will mail such
checks to the Noteholder's address of record as of the last day of the calendar
quarter for which interest is paid. The names and addresses of registered
holders of the Notes (the "Noteholders") will be maintained by AmREIT at its
principal business offices. A Noteholder's "address of record" will be the
address specified in the subscription documents, or such other address of which
the Noteholder advises AmREIT by written notice. The Notes will not be subject
to a sinking fund.
MATURITY. Unless sooner redeemed or called as described below, all Notes
will mature on December 31, 2004 (the "Maturity Date"), at which time the
entire unpaid balance of principal and accrued interest will be due and
payable.
CONVERSION TO SHARES. At any time after their issuance, a Noteholder may
elect to convert all, or any portion, of his or her Note into Shares of the
Company's Common Stock at a price of $11.50 per Share. The conversion right
will exist so long as the Note remains outstanding, except that it terminates
on the fifteenth (15th) day prior to (I) the Redemption Date in the event of an
early call of the Note by AmREIT as described below; or (ii) the effective date
of any merger, reorganization, or consolidation involving AmREIT or the sale of
all or substantially all of the Company's assets. The Note conversion right
may be exercised by submitting the completed and executed Conversion Election,
a copy of which is included as an exhibit to the Note, along with the facsimile
copy of the Note and any additional cash payment. AmREIT will then issue
Shares to the Noteholder dated as of the date immediately following the date of
the last scheduled interest payment. No fractional Shares will be issued and
the converting Noteholder will have the right to submit cash at the rate of
$11.50 per Share to purchase any such fractional interest created by the amount
of Notes converted. Accrued but unpaid interest will be paid to the converting
Noteholder. The exercise price and the number and kind of securities issuable
on conversion are subject to adjustment upon the occurrence of certain events,
including stock dividends or distributions, certain subdivisions, combinations
or reclassification of Shares.
REDEMPTION BY AMREIT. The Notes may be called for prepayment by AmREIT,
in whole or in part, at any time, or from time to time, by delivering to the
Noteholders' address of record a written notice of such redemption. Such
notice shall be made not less than 30 days nor more than 60 days prior to the
Redemption Date. The Redemption Price of the Notes will be their unpaid
principal balance plus accrued interest to the date called for prepayment (the
"Call Date"). To the extent that less than all of the Notes are called for
redemption, the Notes may be redeemed either pro rata or by lot in the sole
discretion of AmREIT.
SATISFACTION AND DISCHARGE. Upon maturity, AmREIT will make payment to
the Registered Noteholder at his or her address shown on the records of AmREIT
on the date of payment. Upon such final required payment, the Notes will be
paid in full and cease to be outstanding. The Noteholder's copy
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of the Note, which is a facsimile, need not be presented to AmREIT for payment.
The Company's obligation to pay interest on the Notes will end on the Maturity
Date.
NATURE OF OBLIGATION. The Notes constitute general obligations of
AmREIT. In the event AmREIT should default on the Notes, the Company's
obligation for payment would be in pari passu to the Company's obligations to
its other general creditors. Noteholders are entitled to have recourse only
against AmREIT for payment of any principal and interest on the Notes and for
any recovery of attorneys' fees and/or costs, or for any other claim based
hereon, and Noteholders may not seek to impose any personal liability for any
such indebtedness on the Trustee, if appointed. Moreover, no director,
officer, employee, stockholder or agent of AmREIT, in his or her capacity as
such, shall have any liability whatsoever for any obligations of AmREIT under
the Notes, or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Noteholder, as a condition to receiving a
Note, waives and releases all such liability. The waiver and release are part
of the consideration for the issuance of the Notes.
REPORTS/NOTEHOLDER LISTS. AmREIT is required to deliver to the
Noteholders (or the Trustee, if one is then appointed) an annual statement
regarding compliance with the terms and conditions of the Notes. In addition,
AmREIT will provide to any Noteholder, upon written request, a list of the
names and addresses of the Noteholders.
THE LOAN AGREEMENT. As a condition to the purchase of the Notes, each
Noteholder is required to execute the Loan Agreement whereby the Noteholder
appoints the Trustee to act as the Noteholders' exclusive Trustee to take
certain administrative and ministerial acts on their behalf and exercise
certain remedies in the event of a default under the Note. Noteholders may not
enforce the terms of the Notes except as provided in the Loan Agreement.
Subject to certain limitations, the Noteholders may authorize the Trustee to
exercise its powers only by the written direction signed or adopted by the
Noteholders holding a majority of the unpaid principal amount of the Notes then
outstanding (a "Majority Vote"). The Trustee may be appointed by the
Noteholders at any time by a Majority Vote.
CERTAIN COVENANTS. The Loan Agreement contains, among other things, the
following covenants:
No Default On Other Debt. AmREIT shall not be in default with
respect to any other of its debt, including any payment of principal or
interest thereon. For the purposes hereof, "default" means the Company's
failure to cure any default under the terms of any debt obligation within
thirty (30) days of written notice of such default by a creditor under the
respective debt obligations.
For the purposes of the foregoing, "debt" means any unsecured
indebtedness, contingent or otherwise, with respect to borrowed money (whether
or not the recourse of the lender is to the whole of the assets of AmREIT or
only to a portion thereof), or evidenced by bonds, notes, debentures or similar
instruments or letters of credit, except any such balance that constitutes a
trade payable, if and to the extent such indebtedness would appear as a
liability upon the balance sheet of AmREIT in accordance with generally
accepted accounting principles.
Limitation On Merger, Consolidation Or Sale Of Assets. During the
time any principal or interest is owing on the Notes, AmREIT may not merge,
consolidate with or transfer all or substantially all of its assets to another
person or entity, unless (I) the successor assumes all obligations of AmREIT
with respect to the Notes, and (ii) after such transaction, no event of default
under the Notes exists.
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Prepayment of Notes. During the time any Principal is due and
owing on the Notes, AmREIT shall apply an amount equal to eighty percent (80%)
of the net proceeds from the sale or refinancing of the real properties
acquired from the Participating Partnerships pursuant to the Merger as
described in the Prospectus to prepay (call) the Notes as provided above. Such
prepayment may, in the sole discretion of AmREIT, be either pro rata as to the
outstanding principal amount of all of the Notes or be used to prepay less than
all of the outstanding Notes in full where the Notes to be prepaid are
determined by lot. For the purposes of this covenant (the "Prepayment
Requirement"), "net proceeds from sale or refinancing" shall mean any cash
proceeds received from the sale or financing of such real property remaining
after the payment of the costs of such transaction, the payment of all
encumbrances or obligations relating to the real property and the payment of
any other debt obligations of AmREIT then due and payable or which AmREIT's
Board of Directors determines to be in the best interests of AmREIT to prepay.
Books and Records. AmREIT shall keep proper books of record and
account, in which full and correct entries shall be made of all dealings or
transactions of or in relation to the Notes and the business and affairs of
AmREIT in accordance with generally accepted accounting principles. AmREIT
shall furnish to the Trustee any and all information related to the Notes as
the Trustee may reasonably request and which is in AmREIT's possession.
EVENTS OF DEFAULT. An event of default, under the terms of the Loan
Agreement, is any one of the following:
a. A default of 30 days in the payment of interest on the Notes;
b. A default of 30 days in payment, when due, of principal on the
Notes;
c. AmREIT's failure to comply with any of its covenants or other
obligations under the terms of the Notes, including its obligation to maintain
current the Company's other debt, to redeem the Notes as required, or keep
and/or maintain aggregate unsecured indebtedness on the required maximum
amounts, if not cured in a timely manner;
d. If not cured in a timely manner, default under the instruments
governing any other indebtedness or any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
other indebtedness for money borrowed by AmREIT, whether such other
indebtedness or guarantee now exists or is hereafter created, which default (a)
is caused by a failure to pay when due principal or interest on such other
indebtedness within the grace period provided and which continues beyond any
applicable grace period (a "Payment default") or (b) results in the
acceleration of such other indebtedness prior to its express maturity, provided
in each case the principal amount of any such other indebtedness, together with
the principal amount of any other such other indebtedness under which there has
been a Payment default or the maturity of which has been so accelerated,
aggregates $250,000 or more; or
e. AmREIT's bankruptcy or insolvency.
Under the terms of the Notes, "bankruptcy" or "insolvency" means (a) the
filing by AmREIT in any court, pursuant to any statute of the United States or
of any state, a petition in bankruptcy or insolvency; (b) the filing for
reorganization or for the appointment of a receiver or trustee of all or a
material portion of AmREIT's assets; an assignment for the benefit of
creditors, if AmREIT admits in writing its
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inability to pay its debts as they fall due; or (d) the seeking, consenting to,
or acquiescing in the appointment of a trustee, receiver or liquidator of any
material portion of its property. Bankruptcy or insolvency shall also include
the filing against AmREIT, in any court, pursuant to any statute of the United
States or of any state, a petition in bankruptcy or insolvency, or for
reorganization, or for appointment of a receiver or trustee of all or a
substantial portion of AmREIT's property, if within 90 days after such
commencement of any such proceeding against AmREIT such petition shall not have
been dismissed.
CURE OF DEFAULT. In order to cure payment Default, AmREIT must mail to
the Noteholders the amount of the nonpayment plus a late payment penalty equal
to simple interest on the amount unpaid at the rate of 10% per annum, measured
from the date the payment should have been mailed, deposited or credited
pursuant to the terms of the Notes until the date it actually is mailed,
deposited or credited.
TRUSTEE IN THE EVENT OF AN UNCURED DEFAULT. If an Event of Default
occurs and is continuing, then the Noteholders of a Majority in Interest of the
Outstanding Notes (a "Majority in Interest") may, within thirty (30) days of
such Event of Default, appoint a Trustee to represent the interests of all the
Holders pursuant to the Loan Agreement and may instruct the Trustee to declare
all the Notes to be due and payable immediately and take any action allowed by
law to collect such amounts. Upon acceptance of such appointment by the
Trustee, the operation of the trust shall commence and the power and rights of
the Trustee thereunder shall begin. If a Majority in Interest of the
Noteholders cannot agree on a Trustee, the trust will not be instituted.
AmREIT has committed to engage and pay a fee to an appropriate
unaffiliated entity, such as an accounting firm, for organizing a vote of the
Noteholders as soon as practicable upon the occurrence of an Event of Default
for the purpose of appointing a Trustee in accordance to the terms of the Loan
Agreement. The entity is not required to act as a Trustee. AmREIT must supply
such entity with the names, addresses and occurrence of any Event of Default.
AmREIT agreed to pay the reasonable expenses of any Trustee duly appointed by a
Majority in Interest of the Noteholders pursuant to the Loan Agreement.
BY EXECUTING THE SUBSCRIPTION DOCUMENT, EACH NOTEHOLDER IS AGREEING TO BE
BOUND BY THE TERMS OF THE LOAN AGREEMENT SHOULD IT COME INTO FORCE BY THE
APPOINTMENT OF A TRUSTEE PURSUANT TO ITS TERMS. EACH PROSPECTIVE INVESTOR
SHOULD CAREFULLY REVIEW THE LOAN AGREEMENT (ATTACHED AS ANNEX 3). THE
FOREGOING IS ONLY A SUMMARY OF THE PROVISIONS OF THE LOAN AGREEMENT.
REMEDIES IN EVENT OF DEFAULT. If any Event of Default occurs and is
continuing, a Majority in Interest may appoint a Trustee under the Loan
Agreement and may instruct the Trustee to declare all Notes to be due and
payable immediately and take any action allowed by law to collect such amounts.
Notwithstanding the foregoing, in the case of an Event of Default arising from
events of bankruptcy or insolvency, all outstanding Notes will become due and
payable without further action or notice. If an Event of Default has occurred
and is continuing, AmREIT must, upon written request of the Trustee, cure such
default and pay for the benefit of the Noteholders the whole amount then due,
any penalties which may be due and such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee hereunder. If AmREIT
fails to cure such defaults and pay such amounts forthwith upon such demand,
the Trustee, in its own name and as Trustee of an express
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<PAGE>
trust, shall be entitled to sue for and recover judgment against AmREIT and any
other obligor on the Notes for the amount so due and unpaid pursuant to the
terms of the Notes.
A Trustee appointed under the terms of the Loan Agreement may not make
any settlement or compromise concerning the rights of the Noteholders, in
regard to payments of principal or interest, unless it is approved in a
separate vote by a Majority in Interest of the Noteholders. Any settlement or
compromise so approved would be binding upon all the Noteholders. The Trustee
may withhold from the Noteholders notice of any Default or Event of Default if
it believes that withholding notice is in their interest except a Default or
Event of Default relating to the payment of principal or interest or penalties.
NO NOTEHOLDER SHALL HAVE THE RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING,
JUDICIAL OR OTHERWISE, WITH RESPECT TO THE LOAN AGREEMENT, THE NOTES, OR FOR
THE APPOINTMENT OF A RECEIVER OR TRUSTEE OR FOR ANY OTHER REMEDY HEREUNDER,
DURING THE PERIOD OF THE OPERATION OF THE LOAN AGREEMENT, UNLESS CERTAIN
CONDITIONS, AS SET FORTH IN THE LOAN AGREEMENT, ARE SATISFIED. The Loan
Agreement requires Noteholders who suffer an actual default on their notes to
obtain the consent of a majority of all Noteholders to appoint a Trustee and
take action against AmREIT. THIS REQUIREMENT, IN EFFECT, MAY LEAVE MANY
NOTEHOLDERS WITHOUT PRACTICAL RECOURSE.
AUTHORITY OF TRUSTEE. Under the Loan Agreement, the Trustee would be the
exclusive Trustee of the Noteholders to act for them in the event of an action
authorized by them upon the default by AmREIT. In general, the Trustee may
only act upon express written instructions by a Majority Vote of the
Noteholders. The Trustee is the sole agent authorized to present AmREIT with
notices of default, demands or requests for information on behalf of the
Noteholders. The Trustee will notify all Noteholders of any actions requested
or taken by it upon the written instructions received after a Majority Vote of
the Noteholders, and any reports or information received by it from AmREIT on
behalf of the Noteholders. The Noteholders of not less than a Majority in
Interest may, on behalf of all Noteholders, waive any past default under the
Loan Agreement and settle or compromise any claim related to the payment of
principal and interest on the outstanding Notes; provided the terms of such
settlement or compromise have been made known to all Noteholders. The rights
of the Noteholders upon the occurrence of a default, as well as a description
of those actions constituting a default under the Notes, are summarized above.
The Trustee is authorized to engage legal counsel, accountants or other
experts who are, in its judgment, reasonably required to effect the course of
action authorized. The Trustee may undertake the action directed by a Majority
Vote only if it is adequately indemnified against its costs and expense for
such action. Such indemnification would likely require the prepayment of any
fees or expenses, including legal fees, accounting fees or other professional
or third party fees reasonably required to effect the action by the
Noteholders. The Trustee is not required to advance any funds for the payment
of expenses, including attorneys' fees, on behalf of the Noteholders or to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers.
The Trustee has the right to be compensated in a reasonable and timely
amount for its services in connection with its actions as the Trustee,
including prior reimbursement for any costs or expenses incurred by it. The
Trustee is entitled to receive reimbursement for fees and costs incurred by it
in taking any action on behalf of the Noteholders from any proceeds realized by
it in enforcing the terms of the Notes. The Trustee's compensation for any
additional acts authorized by the Noteholders will be paid by the
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<PAGE>
Noteholders in the amounts and on the terms prescribed by the Trustee. To the
extent any of these fees or costs are incurred as the result of a default by
AmREIT, AmREIT must reimburse such amounts to the Noteholders.
The Trustee is charged to perform such duties, and only such duties, as
are specifically set forth in the Loan Agreement. The Trustee is not liable to
the Noteholders for any act taken in good faith and not involving its willful
misconduct, and the Noteholders jointly and severally agree to indemnify
Trustee and to hold it harmless against, any loss, liability or expense,
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Loan Agreement. The
Loan Agreement authorizes the Trustee to act on the part of the Noteholders
only to the extent provided in the Loan Agreement. The Trustee is not
empowered to, nor will it, keep the Note registration ownership records, hold
the Notes on behalf of the Noteholders, or collect or disburse funds with
respect to the Notes on behalf of the Noteholders.
AMENDMENT, SUPPLEMENT AND WAIVER
The Loan Agreement and/or the Notes may be amended or supplemented with
the consent of a Majority in Interest of the Noteholders and any Default, Event
of Default, compliance or noncompliance with any provision of the Notes may be
waived with the consent of a Majority in Interest; provided that any such
amendment or supplement affecting the term, interest rate and other terms of
the Notes must be ratable and proportionate in effect on all outstanding
Noteholders based on the aggregate amount of principal and interest and penalty
payments due them.
REMOVAL, REPLACEMENT AND RESIGNATION OF TRUSTEE. The Loan Agreement
provides that the Noteholders, by a Majority Vote, may appoint and thereafter
remove and replace the Trustee upon prior written notice. The Trustee may
resign, at any time, upon prior written notice to the Noteholders and AmREIT.
No resignation or removal of the Trustee or appointment of a successor Trustee
shall become effective until the acceptance of appointment by the successor
Trustee.
AMENDMENT OF LOAN AGREEMENT AND NOTE. The terms and conditions of the
Loan Agreement and the Notes, which constitute contractual agreements between
AmREIT and the Noteholders, may be amended or supplemented by a Majority Vote
of the Noteholders. The foregoing notwithstanding, AmREIT may, without the
consent of any Noteholder, amend or supplement the Note terms to cure any
ambiguity, defect or inconsistency, to provide for the assumption of its
obligations to the Noteholders in the case of merger or acquisition, or to make
any change that does not materially, adversely affect the rights of any
Registered Noteholder. However, without the consent of each Registered
Noteholder affected, AmREIT may not: (I) reduce the principal amount of the
Notes; (ii) reduce the number of Noteholders who must consent to an amendment
of any of the Note terms; (iii) reduce the interest rate or change the interest
payment date for any Note; (iv) reduce the principal of, or change the fixed
maturity date of, any Note; or (v) make any change in the provisions concerning
waiver of a default or Event of Default by the Noteholders or the rights of the
Noteholders to receive payment of principal or interest.
ALLOCATION OF THE MERGER CONSIDERATION
ALLOCATION METHODOLOGY. AmREIT is offering to issue in the aggregate up
to 3,009,735 Shares, which will be allocated among the Participating
Partnerships based on the Exchange Ratio of the Partnership as follows.
Pursuant to the Merger Agreement, each Limited Partner of the Participating
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Partnerships will receive Shares in exchange for Units held as follows: Cash
will be issued in lieu of fractional Shares based on the Exchange Price.
<TABLE>
<CAPTION>
EXCHANGE RATIO:
ORIGINAL PRICE NO. OF SHARES
PARTNERSHIP PER UNIT PER UNIT
----------- -------------- ---------------
<S> <C> <C>
FUND III $30,000 3,819.11
FUND IV 30,000 2,663.90
FUND V 30,000 2,815.50
FUND VI 30,000 3,051.39
FUND VII 30,000 2,968.11
FUND VIII 30,000 3,151.48
FUND GDYR 30,000 2,629.95
FUND IX 1,000 98.06
FUND X 1,000 98.58
FUND XI 1,000 97.62
</TABLE>
- ----------
EXCHANGE RATIO. The Exchange Ratio is determined by dividing the Net
Asset Value per Unit of each Partnership by the Exchange Price of $9.34 per
share.
NET ASSET VALUES. The Net Asset Value of each Partnership equals (I) the
negotiated price of the Partnership's real estate assets (properties), plus
(ii) the Partnership's cash and cash equivalent assets, less any debt (the "Net
Cash") at the Effective Date of the Merger. The only material assets of each
Partnership are its properties and cash. None of the Partnerships is expected
to have any material debt at the Effective Date. The Exchange Ratio is subject
to adjustment for the participating Partnerships actual Net Cash at the
Effective Date and, in the case of Fund IV and Fund V, the unpaid balance of
the Atlas Note as of the Effective Date.
The price of each Partnership's properties was determined by negotiations
between the General Partner and the Independent Directors. In his negotiations
on behalf of the Partnerships, Mr. Taylor was to consider the opinion to be
rendered by Houlihan that the Merger is fair to the Limited Partners from
a financial point of view. Houlihan's Fairness Opinions are subject to
certain qualifications and limitations. See "THE FAIRNESS OPINIONS - The
Houlihan Fairness Opinions" below. In their negotiations on behalf
of AmREIT, the Independent Directors were advised by Bishop-Crown, which
advised the Independent Directors regarding the value of the Partnership's
Properties and has rendered its opinion that the Merger is fair from a
financial point of view to AmREIT and its shareholders. The Bishop-Crown
opinion is subject to certain qualifications and limitations. See "THE
BISHOP-CROWN OPINION" above.
The following table sets forth the real property and net cash components
of NAV of each Partnership.
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<PAGE>
<TABLE>
<CAPTION>
NEGOTIATED PARTNERSHIP
PRICE OF NET CASH AT NET ASSET
PARTNERSHIP PROPERTIES 3/31/1998 VALUE (NAV)
----------- ------------ ----------- -----------
<S> <C> <C> <C>
FUND III $ 1,100,000 $ 23,621(2) $ 1,123,621
FUND IV 500,000 9,865(2) 509,865
FUND V 410,000 10,749(2) 420,749
FUND VI 285,000 0(2) 285,000
FUND VII 1,010,000(1) 29,674 1,039,674
FUND VIII 1,775,000(1) 49,958 1,824,958
FUND GDYR 1,090,000(1) 3,085 1,093,085
FUND IX 4,850,000 87,264 4,937,264
FUND X 10,390,000 48,594 10,438,594
FUND XI 6,350,000 88,116 6,438,116
------------ --------- -----------
Total $ 27,760,000 $ 350,925 $28,110,925
</TABLE>
(1) Amounts reflect value before allocation among interests of Limited Partners
(99%) and general partners (1.0%).
(2) Assumes Disposition Fee is paid to general partners from cash reserves in
shares of the Exchange Price.
- ----------
The method of the Merger consideration described above was utilized by
the General Partner because he deemed it the best method to allocate Shares
among the Partnerships based upon the underlying value of the properties and
cash assets owned by each Partnership. Other methods of allocation were not
considered by the General Partner since no other acceptable options could be
identified which in the view of the General Partner allocated value among the
Partnerships equitably.
The following table shows the Merger consideration in Shares offered to
each Partnership and includes the following: (a) the NAV assigned to each of
the Partnerships; (b) the percentage of the NAV of each Partnership against the
aggregate NAV of all Partnerships; the number of Shares to be allocable to
each of the Partnerships based upon its NAV and the percentage of the total
amount of all such Shares offered by AmREIT; (d) the number of Shares that
would be issued by AmREIT in exchange for each $1,000 of Limited Partners'
Adjusted Capital at March 31, 1998.
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<PAGE>
<TABLE>
<CAPTION>
ALLOCATION OF SHARES
---------------------------------
PERCENTAGE OF TOTAL NO. OF AS PERCENTAGE PER $1,000 OF
AGGREGATE NAV OF SHARES OFFERED TO OF AGGREGATE ADJUSTED CAPITAL
PARTNERSHIP NAV PARTNERSHIPS THE PARTNERSHIP SHARES AT 3/31/1998(1)
- ----------- ----------- ---------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
FUND III $ 1,123,621 3.96% 120,302 3.96% 128.69
FUND IV(2) 509,865 1.80% 54,589 1.80% 88.76
FUND V(3) 420,749 1.48% 45,048 1.48% 97.95
FUND VI 285,000 1.03% 30,514 1.03% 103.53
FUND VII 1,039,674 3.64% 111,314 3.64% 97.95
FUND VIII 1,824,958 6.39% 195,392 6.39% 104.34
FUND GDYR 1,093,085 3.93% 117,033 3.93% 94.27
FUND IX 4,937,264 17.47% 528,615 17.47% 98.06
FUND X 10,438,594 37.43% 1,117,623 37.43% 97.58
FUND XI 6,438,116 22.87% 689,306 22.87% 97.62
----------- ------ --------- ------
Total $28,110,925 100.00% 3,009,735 100.00%
</TABLE>
(1) Amount is net of general partners' interest and/or disposition fees, if
any.
(2) Includes interest in Atlas Note of $107,164 at March 31, 1998.
(3) Includes interest in Atlas Note of $101,692 at March 31, 1998.
- ----------
In Fund VII, Fund VIII and Fund GDYR, the Shares shown allocated to the
Limited Partners, but not the Net Asset Values, are net of shares allocable to
the general partners pursuant to their unsubordinated general partner interests
in distributions of such Partnership.
RETURN TO LIMITED PARTNERS FROM THE MERGER. The following table sets
forth the anticipated return to the Limited Partners as a result of the Merger
based on the Exchange Price of $9.34 per Share. The Table sets forth the
return from the Merger and return from the Merger plus the cumulative return to
the Limited Partners from distributions through March 31, 1998. See "THE
PARTNERSHIPS -- Partnership Distributions."
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<PAGE>
<TABLE>
<CAPTION>
RETURN FROM MERGER RETURN FROM MERGER AS
PER $1000 OF A PERCENTAGE OF L.P.S TOTAL CUMULATIVE CUMULATIVE RETURN
ADJUSTED CAPITAL ADJUSTED CAPITAL AS RETURN BASED ON AS A PERCENTAGE OF
PARTNERSHIP AT 3/31/1998(1) OF 3/31/1998 EXCHANGE PRICE ADJUSTED CAPITAL
- ----------- ------------------ --------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
FUND III $1,202 120.20% $ 2,221,019 249.30%
FUND IV 829 82.90% 966,144 165.17%
FUND V 914 91.39% 838,146 190.96%
FUND VI 967 96.70% 523,486 187.03%
FUND VII 915 91.48% 1,900,569 177.84%
FUND VIII 975 97.45% 3,133,424 178.51%
FUND GDYR 880 88.05% 1,795,467 154.66%
FUND IX 916 91.59% 7,845,378 154.46%
FUND X 911 91.14% 14,252,494 133.32%
FUND XI 912 91.18% 7,509,261 115.23%
-----------
Total $40,985,388
</TABLE>
- ----------
(1) Based on Exchange Price of $9.34.
The following table sets forth the anticipated return to the Limited
Partners from the Merger as a result of the Merger based on a share price of
$10.25, the last price at which AmREIT offered the Shares to the public. The
table sets forth the return from the Merger and the return from the Merger plus
the cumulative return from distributions through March 31, 1998. Returns are
expressed in amounts per $1,000 of Adjusted Capital.
<TABLE>
<CAPTION>
RETURN FROM MERGER RETURN FROM MERGER TOTAL CUMULATIVE PER
PER $1000 ADJUSTED AS A PERCENTAGE OF $1,000 OF ADJUSTED CUMULATIVE RETURN
CAPITAL AT SHARE L.P.S ADJUSTED CAPITAL RETURN BASED ON AS A PERCENTAGE OF
PARTNERSHIP PRICE OF $10.25 CAPITAL SHARE PRICE OF $10.25 ADJUSTED CAPITAL
- ----------- ------------------ ------------------ ------------------------ ------------------
<S> <C> <C> <C> <C>
FUND III $1,319 131.91% $2,376 237.59%
FUND IV 910 90.98% 1,571 157.10%
FUND V 1,003 100.29% 1,821 182.05%
FUND VI 1,061 106.12% 1,776 177.61%
FUND VII 1,004 100.40% 1,689 168.92%
FUND VIII 1,069 106.94% 1,690 169.01%
FUND GDYR 966 96.62% 1,461 146.08%
FUND IX 1,005 100.52% 1,455 145.54%
FUND X 1,000 100.02% 1,244 124.44%
FUND XI 1,001 100.06% 1,063 106.35%
Total
</TABLE>
- ----------
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<PAGE>
ALLOCATION OF THE NOTES. As in the case of the Net Asset Value estimates
above, the Net Cash at the Effective Date has been estimated for the purpose of
the foregoing tables and the Liquidation Value of each Partnership is subject
to adjustment for actual Net Cash at the Effective Date.
The following table sets forth the calculation of the Liquidation Value
of each Partnership.
<TABLE>
<CAPTION>
LIQUIDATION VALUE (NET
ORDERLY SALE CASH AT 3/31/1998 PLUS MAX. PRINCIPAL
VALUE OF ORDERLY SALE VALUE AMOUNT OF NOTES
PARTNERSHIP PROPERTIES(1)(2) OF PROPERTIES(3) OFFERED (4)
- ----------- ---------------- ---------------------- ---------------
<S> <C> <C> <C>
FUND III $ 1,093,436 $ 1,117,057 $ 223,411
FUND IV 452,962 462,827 92,565
FUND V 406,992 417,741 83,548
FUND VI 283,159 283,159 56,632
FUND VII(4) 935,612 965,286 193,057
FUND VIII(4) 1,775,877 1,825,835 365,167
FUND GDYR(4) 1,070,137 1,073,222 214,644
FUND IX 4,354,924 4,442,188 888,438
FUND X 8,816,621 8,865,215 1,773,043
FUND XI 5,361,203 5,449,319 1,089,864
----------- ----------- ----------
Total $24,550,923 $24,901,848 $4,980,370
</TABLE>
(1) Orderly Sale Value equals the General Partner's estimate of each
Partnership's properties based on a net sale valuation approach.
(2) Liquidation Value equals Estimated Cash at Closing plus Orderly Sale Value.
(3) Cash is net of 3.0% Disposition fee.
(4) Equals 20% of Total Liquidation Value.
- ----------
The following table sets forth the principle amount of the Notes offered
to the Limited Partners on a per unit and per $1,000 original investment basis.
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<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NOTE
OFFERED PER:
--------------------------
MAXIMUM PRINCIPAL PERCENT OF
AMOUNT OF NOTES $1,000 ORIG. ORIG. $1000
PARTNERSHIP OFFERED L.P. UNIT INVESTMENT INVESTMENT
- ----------- ----------------- --------- ------------ -----------
<S> <C> <C> <C> <C>
FUND III $ 223,411 $35,462 $1,182 118.21%
FUND IV 92,565 22,577 753 75.26%
FUND V 83,548 26,109 870 87.03%
FUND VI 56,632 28,316 944 94.39%
FUND VII 193,057 25,739 858 85.80%
FUND VIII 365,167 29,449 982 98.16%
FUND GDYR 214,644 24,117 804 80.39%
FUND IX 888,438 824 824 82.41%
FUND X 1,773,043 774 774 77.40%
FUND XI 1,089,864 772 772 77.17%
----------
Total $4,980,370
</TABLE>
- ----------
As in the case of the Liquidation Values estimates above, the Net Cash at
the Effective Date has been estimated for the purpose of the foregoing tables
and the Liquidation Value of each Partnership is subject to adjustment for
actual Net Cash at the Effective Date.
SHARES ISSUABLE TO THE GENERAL PARTNERS. The General Partner will also
receive Shares in exchange for his general partnership interests in the
following Partnerships:
<TABLE>
<CAPTION>
CONSIDERATION ALLOCATION
PAID OF SHARES
------------- ----------
<S> <C> <C>
FUND VII $1,000 1,113
FUND VIII 1,000 1,954
FUND GDYR 1,000 1,170
------ -----
Total $3,000 4,237
</TABLE>
In addition to the foregoing shares, the general partners have agreed to
accept shares at the Exchange Price in payment for the disposition fees
otherwise payable to them under the Partnership Agreements of the following
Partnerships.
<TABLE>
<CAPTION>
AMOUNT OF NO. OF SHARES
PARTNERSHIP DISPOSITION FEE RECEIVED
----------- --------------- -------------
<S> <C> <C>
FUND III $30,000 3,597
FUND IV 17,100 1,317
FUND V 12,900 1,381
FUND VI 9,000 899
------- -----
Total $69,000 7,372
</TABLE>
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<PAGE>
In each case, the disposition fee equals 3.0% of the fair value of the
Partnerships' properties as determined for the purposes of the Merger.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the Partnerships, the General Partner, and AmREIT officers. No formal
procedures were put in place by the General Partner, or his affiliates, to
minimize the potential conflicts of interest. Certain of these conflicts of
interest are summarized below.
AFFILIATED GENERAL PARTNERS. The General Partners have sought to
discharge faithfully their fiduciary duties to each of the Partnerships, but it
should be borne in mind that each of the general partners is affiliated with
the General Partner, which ultimately controls the general partners and who is
the largest shareholder of AmREIT, owning approximately 10.62% of the
outstanding Shares. Upon consummation of the Merger, the General Partner will
still own up to approximately 10.68% of the outstanding Shares. No Partnership
was separately represented by parties independent of General Partner in
structuring and negotiating the terms of the Merger. The General Partner
believes that the requirement of receipt of the Houlihan Fairness Opinions,
the right to receive Notes in lieu of shares granted to Limited Partners who
believe that the applicable Exchange Ratio does not provide such Limited
Partners a number of Shares equal to the fair market value of their Units
and other aspects of procedural fairness that have been incorporated into
the structure of the Merger, the allocation of Shares to each Participating
Partnership and the expected benefits to Limited Partners from the Merger
offset any detriment arising from such conflicts of interest or the
absence of an independent representative. Had separate representation
been arranged for each Partnership, the terms of the Merger might have
been different and possibly more favorable to the Limited Partners.
In addition, if separate representation had been arranged for each
Partnership, issues unique to the value of a given Partnership might have
received greater attention during the structuring of the Merger, and there
might have been adjustments in the Net Asset Values allocated among the
Partnerships, thereby increasing or decreasing the number of Shares allocable
to such Partnership. See "RISK FACTORS -- Lack of Independent Representation"
and "-- Conflicts of Interest."
BENEFITS TO MR. TAYLOR AND HIS AFFILIATES. Because the General Partner
has a financial interest in consummating the Merger, there is an inherent
conflict of interest in his structuring the terms and conditions of the Merger
and the manner in which the Merger has been structured might have been
different if structured by persons having no financial interest in whether or
not the Merger proceeded. The financial benefits to General Partner from the
Merger include the following:
(a) The General Partner will be entitled to payment
of up to 349,333 shares upon consummation of the Merger as a result of the
terms of payments of the Share Balance payable to him pursuant to the recently
completed Adviser Acquisition. The Adviser Acquisition was approved by
AmREIT's shareholders and consummated and, thus, the Limited Partners did not
have the opportunity to vote on the Adviser Acquisition.
(b) Should the Merger be consummated, the General
Partner and his Affiliates will receive 1,059 Shares, 2,104 Shares, and 1,129
Shares, respectively, as general partners of FUND VII, FUND VIII and FUND GDYR.
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<PAGE>
The General Partner and/or his Affiliates will
receive 3,533 Shares, 1,606 Shares, 1,317 Shares and 915 Shares, respectively,
from FUND III, FUND IV, FUND V and FUND VI in payment of disposition fees for
the transfer of the properties of these Partnerships in the Merger.
However, the Merger also eliminates the following benefits currently
available to the General Partner and his Affiliates and subjects him to the
following detriments:
(I) If the Merger proceeds, the General
Partner will relinquish his control over
the Partnerships because AmREIT will be
controlled by the Board of Directors who
are elected by the shareholders of
AmREIT.
(ii) The general partners have agreed to waive
their rights to receive any Shares to
which they may otherwise be entitled in
exchange for services (other than the
disposition fees described above) or the
value of their future interests.
FEATURES DISCOURAGING POTENTIAL TAKEOVERS. Certain provisions in the
Articles of Incorporation and Bylaws, as well as statutory rights under
Maryland law, could be used by AmREIT's management, including the General
Partner, to delay, discourage, or thwart efforts of third parties to acquire
control of, or a significant equity interest in, AmREIT. See "COMPARISON OF
OWNERSHIP OF UNITS AND SHARES" and "RISK FACTORS -- Anti-Takeover Provisions."
FIDUCIARY RESPONSIBILITY
OFFICERS AND DIRECTORS OF AMREIT. The Directors are accountable to
AmREIT and its shareholders as fiduciaries and must perform their duties in
good faith, in a manner believed to be in the best interests of AmREIT and its
shareholders and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
AmREIT's Charter provides that no Manager or officer of AmREIT shall be liable
to AmREIT for any act, omission, loss, damage, or expense arising from the
performance of his or her duties under AmREIT save only for his or her own
willful misfeasance or malfeasance or negligence. In discharging their duties
to AmREIT, Directors and officers of AmREIT shall be entitled to rely upon
experts and other matters as provided in the Maryland General Corporation Law
(the "MGCL") and AmREIT's Bylaws. The Charter provides that AmREIT will
indemnify its Directors and officers to the fullest extent permitted under the
MGCL. Pursuant to the Charter and the MGCL, AmREIT will indemnify each Manager
and officer against any liability and related expenses (including attorneys'
fees) incurred in connection with any proceeding in which he or she may be
involved by reason of serving in such capacity so long as he or she acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of AmREIT, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. A Manager and officer is also entitled to indemnification against
expenses incurred in any action or suit by or in the right of AmREIT to procure
a judgment in its favor by reason of serving in such capacity if he or she
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of AmREIT, except that no such indemnification will be
made if he or she is judged to be liable to AmREIT, unless the applicable court
of law determines that despite the adjudication of liability the Manager or
officer is reasonably entitled to indemnification for such expenses.
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The Charter authorizes AmREIT to advance reasonable funds to a Manager or
officer for costs and expenses (including attorneys' fees) incurred in a suit
or proceeding upon receipt of an undertaking by such Manager or officer to
repay such amounts if it is ultimately determined that he or she is not
entitled to be indemnified. AmREIT has entered into agreements with the its
Directors and executive officers, indemnifying them to the fullest extent
permitted by the MGCL. Shareholders may have more limited recourse against such
persons than would apply absent these provisions and agreements. To the extent
that the foregoing provisions concerning indemnification apply to actions
arising under the Securities Act, AmREIT has been advised that, in the opinion
of the Commission, such provisions are contrary to public policy and therefore
are not enforceable. AmREIT intends to obtain and maintain insurance
indemnifying the Directors and officers against certain civil liabilities,
including liabilities under the federal securities laws, which might be
incurred by them in such capacity.
GENERAL PARTNERS OF THE PARTNERSHIPS. Under both Nebraska and Texas and
partnership law, the general partners are accountable to the Partnerships as
fiduciaries and are required to exercise good faith and integrity in all their
dealings in the Partnership's affairs. The Partnership Agreements generally
provide that neither the general partners nor any of their Affiliates
performing services on behalf of the Partnerships will be liable to the
Partnership or any of the Limited Partners for any act or omission by any such
person performed in good faith pursuant to authority granted to such person by
the Partnership Agreements, or in accordance with its provisions, and any
manner reasonably believed by such person to be within the scope of authority
granted to such person and in the best interests of the Partnership provided
that such act or omission did not constitute fraud, misconduct, bad faith or
negligence. As a result, Limited Partners might have a more limited right of
action in certain circumstances than they would have in the absence of such a
provision in the Partnership Agreements.
The Partnership Agreements also generally provide that the general
partners and certain related parties are indemnified from losses relating to
acts performed or failures to act in connection with the business of the
Partnerships (except to the extent indemnification is prohibited by law)
provided that such person determined in good faith that the course of conduct
did not constitute fraud, negligence or misconduct. Notwithstanding the
foregoing, none of the above-mentioned persons is to be indemnified by the
Partnerships from liability, loss, damage, cost or expense incurred in
connection with any claim involving allegations that such person violated
federal or state securities laws unless (a) there has been a successful
adjudication on the merits of the claims of each count involving alleged
securities law violations as to the person seeking indemnification and the
court approves indemnification of the litigation costs, (b) such claims have
been dismissed with prejudice on the merits by a court of competent
jurisdiction and the court approves indemnification of the litigation costs, or
a court of competent jurisdiction has approved a settlement of the claims
against the person seeking indemnification and finds that indemnification of
the settlement and related costs should be made. In each of the foregoing
situations, the court of law considering the request for indemnification must
be advised as to the position of the Commission, and any other applicable
regulatory authority regarding indemnification for violations of securities
laws. Indemnification may not be enforceable as to certain liabilities arising
from claims under the Securities Act and state securities laws; and, in the
opinion of the Commission, such indemnification is contrary to public policy
and is therefore unenforceable. For purposes of the foregoing, the affiliates
of the general partners will be indemnified only when operating within the
scope of the general partners' authority. Any claim for indemnification under
the Partnership Agreement will be satisfied only out of the assets of the
Partnership and no Limited Partner will have any personal liability to satisfy
an indemnification claim made against the Partnership.
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The Partnerships may also advance funds to a person indemnified under the
Partnership Agreements for legal expenses incurred as a result of legal action
brought against such person if such person undertakes to repay the advanced
funds to the Partnership if it is subsequently determined that such person is
not entitled to indemnification. The Partnerships do not pay for any insurance
covering liability of the general partners or any other indemnified person for
acts or omissions for which indemnification is not permitted by the Partnership
Agreements, although the general partners may be named as additional insured
parties on policies obtained for the benefit of the Partnership if there is no
additional cost to such Partnership. As part of its assumption of liabilities
in the Merger, AmREIT will indemnify the general partners and their affiliates
for periods prior to and following the Merger to the extent of the indemnity
under the terms of the Partnership Agreements and applicable law.
MARKET PRICES AND DISTRIBUTIONS
THE MARKET PRICE OF THE SHARES. The Shares are not listed or traded on
any national securities exchange or quoted on Nasdaq, nor will the Shares be
traded in any such secondary market upon consummation of the Merger. Secondary
sales of the Shares have been limited and sporadic and management is unaware of
the price and terms of any such sales to the extent they have occurred. In
general, management monitors such transfers only with respect to their volume.
The offering price of the common stock in AmREIT's most recent public offering
was $10.25 per share.
AMREIT DISTRIBUTIONS. The following table sets forth the amount and
dates of the distributions made by AmREIT through March 31, 1998.
<TABLE>
<CAPTION>
AMOUNT PAYMENT DATE
------ ------------
<S> <C>
$0.0950 June 30, 1994
$0.10245 September 30, 1994
$0.15305 December 31, 1994
$0.15625 March 31,1995
$0.15783 June 30, 1995
$0.15795 September 30, 1995
$0.1690 December 31, 1995
$0.17524 March 31, 1996
$0.17615 June 30, 1996
$0.1770 September 30, 1996
$0.17938 December 31, 1996
$0.1800 March 31, 1997
$0.18025 June 30, 1997
$0.18051 September 30, 1997
$0.1807 December 31, 1997
$0.1809 March 31, 1998
</TABLE>
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AmREIT intends to evaluate future distributions on a quarterly basis.
MARKET PRICE OF THE LIMITED PARTNER UNITS. The Units are not listed on
any national securities exchange or quoted on Nasdaq, and there is no
established public trading market for the Units. Secondary sales activity for
the Units has been limited and sporadic. Also, a number of these transfers
were between the same beneficial owner(s), family members or related persons
and cannot be considered sales at prevailing market prices. The General
Partner monitors transfers of the Units (I) because the admission of the
transferee as a substitute Limited Partner requires the consent of the general
partners under each Partnership Agreement; and/or (ii) in order to track
compliance with safe harbor provisions to avoid treatment as a "publicly traded
partnership" for tax purposes. It should be noted that some transactions may
not be reflected on the records of the Partnerships. Based upon the transfer
records of the Partnerships, the General Partner is not aware of the price or
terms of such transfers.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction of all conditions to
consummation of the Merger (see "THE MERGER -- Conditions to Consummation of
the Merger"), the parties will file articles of merger with the Clerk of Harris
County and articles of merger with the respective secretaries of state of Texas
and of the states of organization of the respective Partnerships. For Texas
state law purposes, the Merger will become effective upon the later of the
filing of the articles of merger described above, or at such later time which
AmREIT and the General Partner shall have agreed upon and designated in such
filings in accordance with applicable law. For accounting purposes, the
parties may agree to make the Merger effective as of a date prior to such
effective date (the 'Effective Time"). AmREIT has the right, acting
unilaterally so long as it has not willfully and materially breached the Merger
Agreement, to terminate the Merger Agreement should the Merger not be
consummated by the close of business on December 31, 1998. Until the Effective
Time of the Merger, the Limited Partners will retain their rights as Limited
Partners of their respective Partnerships to vote on matters submitted to them.
See "THE MERGER -- Termination; Extension, Waiver and Amendment."
MANAGEMENT, OPERATIONS AND HEADQUARTERS AFTER THE MERGER
Following the Merger, the Directors of AmREIT prior to the Merger will
continue to serve as Directors of AmREIT. The executive officers of AmREIT
prior to the Merger will continue to serve as the executive officers of AmREIT
after the Merger.
Following the Merger, the headquarters of AmREIT will continue to be
located at 8 Greenway Plaza, Suite 824, Houston, Texas 77046.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of AmREIT and the Partnerships to effect the
Merger are subject to the satisfaction of certain conditions (none of which may
be waived), including the following: (I) the Merger Agreement and the
transactions contemplated thereby shall have been approved by the shareholders
of AmREIT and the Limited Partners of the Participating Partnerships; (ii) the
California Commissioner of Corporations shall have issued a permit for the
issuance of the Shares and the Notes based on his determination following the
California fairness hearing that such issuance is fair, just and equitable;
(iii) the Definitive Joint Consent Solicitation Statement shall have been
timely filed with the Commission and
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all necessary state securities laws or "Blue Sky" permits or approvals required
to carry out the transactions contemplated by the Merger Agreement shall have
been obtained and no stop order with respect to any of the foregoing shall be
in effect; (iv) none of the parties shall be subject to an order or injunction
of a court of competent jurisdiction or other legal prohibition which prohibits
the consummation of the transactions contemplated by the Merger Agreement; and
(v) all material actions by or in respect of or filings with any governmental
entity required for consummation of the Merger and related transactions shall
have been obtained or made.
Consummation of the Merger is also subject to the satisfaction or waiver
of certain other conditions specified in the Merger Agreement, including, among
others: (I) the representations and warranties in the Merger Agreement of each
of the parties shall be true and correct as of the Closing Date; (ii) each
party shall have performed its obligations contained in the Merger Agreement at
or prior to the Effective Time; (iii) from and after the date of the Merger
Agreement there shall not have occurred any change in the financial condition,
business or operations of either party that would have or would be reasonably
likely to have a material adverse effect on the business, results of operations
or financial condition of such party; (iv) each party shall have received an
opinion of counsel; and (v) each party shall have obtained all consents and
waivers from third parties necessary to consummate the Merger and related
transactions.
The parties may waive one or more of the foregoing conditions to the
Merger except that if such waiver involves a material change to the terms of
the Merger, the parties shall resolicit Consents from the waiving party's
shareholders or Limited Partners, as applicable.
If nine of the ten Partnerships do not approve the Merger, AmREIT has the
right, but not the obligation, to consummate the Merger with the one
Participating Partnership. See "THE MERGER -- Conditions to Consummation of the
Merger."
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement to its effective
date, the parties have agreed to carry on their respective business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve in tact their respective current business
organizations, goodwill and ongoing business. The parties also agreed, except
as disclosed to the other party or in certain limited circumstances specified
therein, that they shall:
(1) Use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees.
(2) Except for the continuing payment of quarterly distributions at a
rate not exceeding its respective current annual rate, no party to
the Merger shall make any distributions or dividends payable with
respect to the Shares and Units.
(3) Confer on a regular basis with one or more representatives of the
other to report operational matters of materiality and any
proposals to engage in material transactions.
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(4) Promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the Commission.
(5) Promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or
the breach in any material respect of any representation,
warranty, covenant or agreement contained therein.
Prior to the Effective Time, except as otherwise disclosed pursuant to
the Merger Agreement, unless AmREIT has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, each Partnership:
(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as conducted.
(2) Shall not amend its Partnership Agreement.
(3) Shall not (I) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing
on the date of the Merger Agreement hereof and disclosed pursuant
to the Merger Agreement, issue any Units, make any distribution,
effect any recapitalization or other similar transaction; (ii)
grant, confer or award any option, warrant, conversion right or
other right not existing on the date of the Merger Agreement to
acquire any Units; (iii) increase any compensation or enter into
or amend any employment agreement with the General Partner or his
Affiliates; or (iv) adopt any new employee benefit plan or amend
any existing employee benefit plan in any material respect, except
for changes which are less favorable to participants in such
plans.
(4) Shall not directly or indirectly redeem, purchase or otherwise
acquire any Units or make any commitment for any such action.
(5) Shall not sell or otherwise dispose of (I) any Partnership
properties; or (ii) except in the ordinary course of business, any
of its other assets which are material, individually or in the
aggregate.
(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person.
(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or satisfaction
in the ordinary course of business consistent with past practice
or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of each
Partnership included in the Partnership's filings with the
Commission or incurred in the ordinary course of business
consistent with past practice.
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(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value,
if less) for all commitments.
(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the
Partnership or the General Partner or his affiliates except to the
extent the same occur in the ordinary course of business
consistent with past practice and would not have a Partnership
Material Adverse Effect (as defined in the Merger Agreement).
(10) Shall not enter into or terminate any lease representing annual
revenues of $100,000 or more (or 5% of its Net Asset Value, if
less).
Prior to the Effective Time, except as may be otherwise disclosed
pursuant to the Merger Agreement, unless each Partnership has consented (such
consent not to be unreasonably withheld or delayed) in writing thereto, AmREIT:
(1) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course
in substantially the same manner as heretofore conducted.
(2) Shall not amend its Articles of Incorporation or Bylaws.
(3) Shall not (I) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights
(including AmREIT's existing dividend reinvestment plan) existing
on the date of the Merger Agreement and disclosed pursuant to the
Merger Agreement, issue any shares of its capital stock, effect
any share split, reverse share split, share dividend,
recapitalization or other similar transaction; (ii) grant, confer
or award any option, warrant, conversion right or other right not
existing on the date hereof to acquire any shares of its capital
shares (except pursuant to any employee incentive plan approved by
shareholders); (iii) amend any employment agreement with any of
its present or future officers or Independent Directors; or (iv)
adopt any new employee benefit plan (including any share option,
share benefit or share purchase plan).
(4) Shall not declare, except as provided above for the continuing
payment of quarterly dividends, set aside or pay any dividend or
make any other distribution or payment with respect to any Shares
or directly or indirectly redeem, purchase or otherwise acquire
any Shares or capital stock of any of its subsidiaries, or make
any commitment for any such action.
(5) Shall not, and shall not permit any of its subsidiaries to, sell
or otherwise dispose of (I) any properties or any of its capital
stock of or other interests in subsidiaries or (ii) except in the
ordinary course of business, any of its other assets which are
material, individually or in the aggregate.
(6) Shall not, and shall not permit any of its subsidiaries to, except
in the ordinary course of business, make any loans, advances or
capital contributions to, or investments in, any other person
other than in connection with the sale of properties.
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(7) Shall not, and shall not permit any of its subsidiaries to pay,
discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice or
in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of AmREIT
included in its reports filed with the Commission or incurred in
the ordinary course of business consistent with past practice.
(8) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case
of any one commitment or in excess of $250,000 for all
commitments, except for those commitments in connection with the
acquisition and/or development of property disclosed in the AmREIT
Disclosure Letter (as defined in the Merger Agreement); and
(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, Independent Director or
Affiliate of AmREIT or any of its subsidiaries, except as provided
in the Merger Agreement or except in the ordinary course of
business.
For purposes of the Merger Agreement, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. For the purposes of the foregoing,
consents on behalf of the Partnership may be given by the General Partner and
consents on behalf of AmREIT must be given by the AmREIT Board with Mr. Taylor
abstaining.
ACQUISITION PROPOSALS
Prior to the Effective Time, each Partnership and AmREIT agreed (I) that
neither of them nor any of their subsidiaries shall, and each of them shall
direct and use its best efforts to cause its respective officers, general
partners, Limited Partners, Independent Directors, employees, agents,
affiliates and representative (including, without limitation, any investment
banker, attorney or accountant retained by it or any of its subsidiaries), as
applicable, not to initiate, solicit or encourage directly or indirectly any
inquiries or the making or implementation of any proposal or offer (including,
without limitation any proposal or offer to its shareholders or limited
partners) with respect to a merger, acquisition, tender offer, exchange offer,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities (or any debt
securities convertible into equity securities) of such party or any of its
subsidiaries, other than the transactions contemplated by the Merger Agreement
(any such proposal or offer being hereinafter referred to as an "Acquisition
Proposal"), or engage in any negotiations concerning, provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal; (ii) that it will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing and
each will take the necessary steps to inform the individuals or entities
referred to above of the undertaken obligations; and (iii) that it will notify
the other party immediately if any such inquiries or proposals are received by,
any such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, it. However, nothing contained
in the Merger Agreement prohibits the General Partner or AmREIT Board from (x)
furnishing information to or entering into discussions or negotiations with any
person or entity that makes an unsolicited bona fide Acquisition Proposal, if,
and only to the extent that (A) the General Partner or AmREIT Board, as
applicable,
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determines in good faith that such action is required for it to comply with his
or its fiduciary duties to Limited Partners or shareholders, respectively,
imposed by law as advised by counsel, (B) prior to furnishing such information
to or entering into discussions or negotiations with, such person or entity,
such party provides written notice to the other party to the Merger Agreement
to the effect that it is furnishing information to, or entering into
discussions with, such person or entity, and subject to any confidentiality
agreement with such person or entity (which such party determined in good faith
was required to be executed in order for the General Partner or AmREIT Board,
as applicable, to comply with his or its fiduciary duties to the Limited
Partners or shareholders, respectively, imposed by law as advised by counsel),
such party keeps the other party to the Merger Agreement informed of the status
(but not the terms) of any such discussions or negotiations; and (y) to the
extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal.
TERMINATION; EXTENSION, WAIVER AND AMENDMENT
TERMINATION BY MUTUAL CONSENT. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the Limited Partners of a Partnership
or the shareholders of AmREIT by the mutual written consent of AmREIT and the
Partnership.
TERMINATION BY EITHER AMREIT OR A PARTNERSHIP. The Merger Agreement may
be terminated and the Merger may be abandoned by action of the General Partner
for any Partnership or the Independent Directors for AmREIT only for good
reason. Under the Merger Agreement, only the following constitutes "good
reason":
(I) By either AmREIT or the Partnership if the Merger
shall not have been consummated by December 31,
1998;
(ii) By AmREIT if the approval of the Limited Partners of
a Partnership shall not have been obtained as
required under the Merger Agreement;
(iii) By the Partnership if the approval of the
shareholders of AmREIT shall not have been obtained
as required under the Merger Agreement;
(iv) By either AmREIT or the Partnership upon a Change In
Control, as defined below, of the other;
(v) By either AmREIT or the Partnership if there has been
a breach by the other of any representation or
warranty contained in the Merger Agreement, or if
either determines in good faith that facts or
circumstances of which it had no previous knowledge,
which would have or would be reasonably likely to
have AmREIT Material Adverse Effect or a Partnership
Material Adverse Effect, as the case may be, which
breach is not cured within 30 days after written
notice of such breach is given to the breaching party
by the non-breaching party;
(vi) By either AmREIT or the Partnership if there has been
a material breach of any of the covenants or
agreements set forth in the Merger Agreement by the
other, which breach
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is not curable or, if curable, is not cured within 30
days after written notice of such breach is given to
the breaching party by the non breaching party;
(vii) By the Partnership if in the exercise of his good
faith judgment as to his fiduciary duties as imposed
by law, and as advised by counsel, the General
Partner determines that such termination is required
by reason of a Partnership Acquisition Proposal being
made;
(viii) By AmREIT if, in the exercise of its good faith
judgment as to its fiduciary duties as imposed by
law, and as advised by counsel, the Independent
Directors determine that such termination is required
by reason of an AmREIT Acquisition Proposal being
made; or
(ix) By either AmREIT or the Partnership if a United
States federal or state court of competent
jurisdiction or United States federal or state
governmental, regulatory or administrative agency or
commission shall have issued an order, decree or
ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement and
such order, decree, ruling or other action shall have
become final and non-appealable, provided that the
party seeking to terminate the Merger Agreement shall
have used all reasonable efforts to remove such
order, decree, ruling or injunction.
EFFECT OF TERMINATION AND ABANDONMENT
If an election to terminate the Merger Agreement is made by the
Partnership (I) other than for "good reason" or (ii) for good reason pursuant
to paragraph (vii) above, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into an
agreement to consummate a Partnership Acquisition Proposal to be subsequently
consummated, the Partnership shall pay as liquidated damages (not as a penalty
or forfeiture) to AmREIT, provided that AmREIT was not in material breach of
its obligations at the time of such termination, an amount equal to the lesser
of (x) the Partnership's Proportionate Share of $500,000 (The "AmREIT
Liquidated Damages Amount") and (y) the sum of (1) the maximum amount that can
be paid to AmREIT without causing AmREIT to fail to meet the requirements of
Sections 856(c)(2) and (3) of the Code determined as if the payment of such
amount did not constitute income described in Sections 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by AmREIT's
certified public accountants plus (2) an amount equal to the AmREIT' Liquidated
Damages Amount less the amount payable under clause (1) above in the event the
REIT receives a letter from its counsel indicating that it has received a
ruling from the IRS to the effect that the AmREIT Liquidated Damages Amount
payment constitutes Qualifying Income. In addition to the AmREIT Liquidated
Damages Amount, AmREIT shall be entitled to receive from the Partnership (or
its successor in interest) all documented out-of-pocket costs and expenses
incurred by it, up to a maximum of the Partnership's Proportionate Share of
Expenses of AmREIT Expenses. The payments to which AmREIT is entitled as
described above shall be its sole remedy with respect to the termination of the
Merger Agreement under the circumstances contemplated above.
If an election to terminate the Merger Agreement is made because of a
Partnership Material Adverse Effect under paragraph (v) above, the Partnership
shall, provided that AmREIT was not in material breach of its obligations at
the time of such termination, pay AmREIT for the AmREIT Expenses, up to a
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maximum of the Partnership's Proportionate Share thereof (although it shall not
be required to pay AmREIT Liquidated Damages Amount), which payment of the
AmREIT Expenses shall be AmREIT's sole remedy for termination of the Merger
Agreement in such circumstances.
If an election to terminate the Merger Agreement is made by the REIT (I)
other than for good reason or (ii) for good reason pursuant to paragraph (viii)
above and, within one year from the date of such termination, AmREIT
consummates an AmREIT Acquisition Proposal or enters into an agreement to
consummate an AmREIT Acquisition Proposal to be subsequently consummated;
AmREIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of its
obligations at the time of such termination. Such liquidated damages shall be
in an amount equal to 120% of the Partnership's Proportionate Share of the
Partnership Merger Expenses (the "Partnership Liquidated Damages Amount"). The
payments to which the Partnership is entitled as described above shall be its
sole remedy with respect to the termination of the Merger Agreement under the
circumstances contemplated above.
If an election to terminate the Merger Agreement is made by the
Partnership pursuant to paragraph (v) above because of an AmREIT Material
Adverse Effect, AmREIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the Partnership
for the Proportionate Share of the Partnership Expenses, up to a maximum
amount equal to the amount of the Partnership's Proportionate Share of the
Partnership Merger Expenses and (although it shall not be required to pay the
Partnership Liquidated Damages Amount), which payment shall be the
Partnership's sole remedy for termination of the Merger Agreement in such
circumstances.
If the Merger Agreement is terminated by either party pursuant to
paragraph (iv) or paragraph (vi) above, the non- terminating party shall,
provided that the terminating party was not in material breach of its
obligations at the time of such termination, pay the terminating party (x) in
the case of termination by the Partnership the Partnership Liquidated Damages
Amount, and in the case of termination by AmREIT, the AmREIT Liquidated Damages
Amount, plus (y) an amount equal to the terminating parties' Proportionate
Share of the Merger Expenses and (z) the non-terminating party shall remain
liable to the terminating party for its breach.
If this Agreement is terminated pursuant to paragraph (I) or paragraph
(ix) above, AmREIT shall, provided that the Partnership was not in material
breach of its obligations hereunder at the time of such termination, pay the
Partnership an amount equal to the Partnership's Proportionate Share of the
Partnership Expenses, which payment shall be the Partnership's sole remedy for
termination of the Agreement in such circumstances.
If an election to terminate this Agreement is made pursuant to paragraphs
(I), (ii) or (iii) above, and a Partnership Acquisition Proposal or an AmREIT
Acquisition Proposal shall have been made and, within one year from the date of
such termination, the non-nominating party consummates such Acquisition
Proposal or enters into an agreement to consummate such Acquisition Proposal
which is subsequently consummated, the non-terminating party shall pay to the
terminating party, provided that the terminating party was not in material
breach of its obligations hereunder at the time of such termination, as
liquidated damages and not as a penalty or forfeiture, an amount equal to (x)
in the case of termination by the Partnership, the Partnership Liquidated
Damages Amount, and in the case of termination by AmREIT, the AmREIT Liquidated
Damages Amount, plus (y) its Proportionate Share of the Merger Expenses. In
addition to such amount, the terminating party shall be entitled to receive
from the non-terminating party
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(or its successor in interest) all of its documented out-of-pocket costs and
expenses in connection with this Agreement and the transactions contemplated
thereby. Such payments to which the terminating party shall be its sole remedy
with respect to the termination of the Agreement.
The Partnership agrees to amend the Merger Agreement at the request of
AmREIT in order to (x) maximize the portion of the AmREIT Liquidated Damages
Amount that may be distributed to AmREIT without causing AmREIT to fail to meet
the requirements of Sections 856(c)(2) and (3) of the Code or (y) improve
AmREIT's chances of securing a favorable ruling described in this Section 9.3,
provided that no such amendment may result in any additional cost or expense to
such other party.
If either party willfully fails to perform its duties and obligations
under this Agreement, the non-breaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party. In the event the REIT or the Partnership is required to
file suit to seek all or a portion of such Liquidated Damages Amount, and it
ultimately succeeds, it shall be entitled to all expenses, including attorney's
fees and expenses, which it has incurred in enforcing its right hereunder.
EXTENSION; WAIVER
At any time prior to the Effective Time, either party, by action taken by
the AmREIT Board or the General Partner, as applicable, may, to the extent
legally allowed, (I) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (ii) waive any
inaccuracies in the representations and warranties made to such party contained
in the Merger Agreement or in any document delivered pursuant hereto; and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
PROPOSED AMENDMENTS TO PARTNERSHIP AGREEMENTS
The general partners of the respective Partnerships are proposing
amendments to the Partnership Agreements to permit the closing of the
transactions contemplated by the Merger. The Partnership Agreements of the
Partnerships do not explicitly provide that the Partnerships can merge with and
into another entity. The respective general partners are proposing to amend
the Partnership Agreements to empower and expressly permit the respective
general partners, for the benefit and on behalf of each respective Partnership,
to consummate the Merger. Also, the Partnership Agreements each place certain
prohibitions on the general partners from entering into various agreements,
contracts or arrangements for and on behalf of the Partnerships with the
general partners or their Affiliates as discussed herein. See "Conflicts of
Interest". Consequently, the Merger Agreement cannot be effected unless and
until such proposed amendments are adopted whether or not AmREIT would be
regarded as an Affiliate of the general partner.
Accordingly, for each of the Partnerships, the Limited Partners are being
asked to consider and vote upon proposed amendments which authorize the
following: (I) the Merger of each Partnership with and into AmREIT, whether or
not AmREIT would be regarded as a Affiliate of the general partners; and (ii)
such other actions as may be necessary under or contemplated by the Merger
Agreement or this Joint Consent Solicitation Statement/Prospectus, irrespective
of any provisions in the Partnership Agreements which might otherwise prohibit
such actions.
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Limited Partners voting in favor of the Merger will be deemed to have
voted in favor of each of these proposed amendments. Since a majority vote of
the Limited Partners is required to approve the proposed amendments, a majority
vote is required to approve the Merger. Similarly, the amendments will not be
effective as to any Partnership that does not participate in the Merger.
THE MERGER EXPENSES
All transaction costs and expenses of the Merger which are estimated to
be $450,000 shall be paid by AmREIT except the Partnerships shall pay the costs
of the Houlihan Opinions, the costs of accountants for the Partnerships and
certain other miscellaneous costs and the costs of Partner communications (the
"Partnership Merger Expenses"). The Partnership Merger Expenses are estimated
to total $150,000. In addition, each Partnership will bear its own direct
costs of due diligence, partner communications and administration. Each
Partnership will bear its Proportionate Share of the Partnership Merger
Expenses, which is equal to the Partnerships relative NAV. In the event the
Limited Partners of the Partnership do not approve the Merger, the General
Partner will pay or reimburse the Partnership's Proportionate Share of the
Partnership Merger Expenses. AmREIT's share of the Merger Expenses includes,
but is not be limited to, costs of Bishop-Crown's fairness opinion, title
policies, its accounting fees and the legal fees, printing and mailing costs of
this Prospectus.
ANTICIPATED ACCOUNTING TREATMENT
AmREIT will account for the Merger as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The fair market value of the
consideration given by AmREIT in the Merger and the market value of liabilities
assumed will be used as the basis of the purchase price. The purchase price
will be allocated to the assets and liabilities of the Participating
Partnership based upon their respective fair market values at the Effective
Time of the Merger. The financial statements of AmREIT will reflect the
combined operations of AmREIT and the Participating Partnerships from the
Effective Time of the Merger.
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THE FAIRNESS OPINIONS
THE BISHOP-CROWN FAIRNESS OPINION
BACKGROUND AND QUALIFICATIONS. AmREIT retained Bishop-Crown Investment
Research, Inc., on February 11, 1998 to render an opinion as to whether the
consideration to be paid by AmREIT pursuant to the Merger was fair from a
financial point of view to AmREIT. A copy of Bishop-Crown's opinion is
included as Annex 4 to this Prospectus. Bishop-Crown was not requested to, and
did not make, any recommendation to the Independent Directors as to the
Exchange Ratio to be provided for in the Merger, which Exchange Ratio was
determined through negotiations between AmREIT and the General Partner.
AmREIT selected Bishop-Crown to provide a fairness opinion because it is
a financial advisor and investment valuation firm with national experience in
the investment analysis, due diligence research, including the valuation of
businesses and their securities in connection with mergers and acquisitions and
for other purposes and has substantial experience with respect to REITs and
other real estate companies and in transactions similar to the Merger.
Bishop-Crown is a nationally recognized investment due diligence and
financial advisory firm among member firms of the National Association of
Securities Dealers, Inc. (the "NASD"). Over the past ten years Bishop-Crown
has provided due diligence underwriting and valuation services to individual
member firms and industry groups. The Independent Directors selected
Bishop-Crown to act as their financial adviser based on its experience with and
expertise in small and emerging companies, including real-estate investment
companies and REITs, its experience in evaluating the fairness of acquisitions
of asset groups by their sponsors and/or affiliated managers, its experience
and expertise in the due diligence examination and analysis of both private and
public companies and its recognition among NASD member firms.
On _____________, 1998, Bishop-Crown delivered its written opinion to the
Board (the "Bishop-Crown Opinion"), to the effect that, as of the date of such
opinion, based on Bishop-Crown's review and subject to the limitations
described below, the consideration to be paid by AmREIT pursuant to the Merger
was fair from a financial point of view to AmREIT. The Bishop-Crown Opinion
does not constitute a recommendation to any shareholder of AmREIT as to how any
such shareholder should vote on the Merger. Bishop-Crown has no existing
contractual obligation to update its fairness opinion.
THE FULL TEXT OF THE BISHOP-CROWN OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON ITS REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX 4 TO THIS PROSPECTUS. AMREIT'S SHAREHOLDERS
ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
Bishop-Crown made a presentation of the Bishop-Crown Opinion and the
underlying financial analysis to the Independent Directors prior to the
meeting. This analysis, as presented to the Independent Directors, is
summarized herein. Independent Directors present at the meeting (either in
person or via teleconference) had an opportunity to ask questions of
Bishop-Crown. Bishop-Crown discussed the information in the report, and the
financial data and other factors considered by Bishop-Crown in conducting its
analysis, all of which are summarized herein.
Bishop-Crown had no restrictions or limitations imposed by either AmREIT
or the Partnerships with respect to its investigation or the procedures
followed in rendering its opinion. In requesting the Bishop-
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Crown Opinion, the Independent Directors did not give any special instructions
to Bishop-Crown or impose any limitations upon the scope of the investigation
that Bishop-Crown deemed necessary to enable it to deliver its opinion. Nor
did Bishop-Crown receive any instructions from either AmREIT, the General
Partner or his affiliates in connection with its engagement and analyses.
Bishop-Crown is not affiliated with AmREIT, the General Partner, or Houlihan.
A copy of the Bishop-Crown Opinion, which sets forth the assumptions made,
matters considered and limits on the review undertaken, is attached hereto as
Annex 4 and is incorporated herein by reference. The summary of the opinion set
forth below is qualified in its entirety by reference to the full text of the
Bishop-Crown Opinion. Shareholders are urged to read the opinion in its
entirety. The opinion is directed only to the fairness of the consideration to
be paid by AmREIT from a financial point of view and does not constitute a
recommendation to any shareholder as to how such shareholder should vote at the
Special Shareholder Meeting.
Management of AmREIT solicited proposals from two firms for the
preparation of the fairness opinion. Bishop-Crown was formally engaged to
render its opinion to the Independent Directors pursuant to a letter of
engagement dated February ___, 1998 (the "Engagement Letter"). The engagement
letter requires AmREIT to pay Bishop-Crown a fee equal to $37,500, all of which
was paid upon delivery of the written opinion as of the date of this
Prospectus. In addition, the engagement letter with Bishop-Crown provides that
AmREIT will reimburse Bishop-Crown for its reasonable out-of-pocket expenses
and will indemnify Bishop-Crown and certain related persons against certain
liabilities, including liabilities under securities laws, arising out of the
Merger or its engagement. The fee was payable to Bishop-Crown regardless of
whether or not its opinion was favorable as to the fairness of the Merger.
In conducting its analysis and arriving at the opinion, Bishop-Crown
reviewed such information and considered such financial data and other factors
as Bishop-Crown deemed relevant under the circumstances, including:
(x) a draft, dated ______________, 1998, of the Merger
Agreement;
(xi) AmREIT's Annual Report on Forms 10-KSB and 10-K and
the related financial information for the fiscal
years ended December 31, 1997 and 1996, respectively,
and AmREIT's Quarterly Report on Form 10-QSB for the
quarterly period ended March 31, 1998;
(xii) for each of Fund IX and Fund X, the Partnership's
Annual Report on Forms 10-KSB and 10-K and the
related financial information for the fiscal years
ended December 31, 1997 and 1996, respectively, and
each such Partnership's Quarterly Report on Form
10-QSB and the related unaudited financial
information for the quarterly period ended March 31,
1998;
(xiii) for each of FUND III, FUND IV, FUND V, FUND VI, FUND
VII, FUND VIII, FUND GDYR, and FUND XI financial
statements for the years ended December 31, 1997 and
1996, which, except in the case of Fund XI, were
unaudited, and unaudited financial statements for
each Partnership for the quarterly period ended March
31, 1998;
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(xiv) certain information, including financial forecasts,
relating to AmREIT's business, earnings, cash flow,
assets and prospects furnished to Bishop-Crown by
AmREIT's management;
(xv) certain information, including financial forecasts,
earnings and cash flow of the properties of each
Partnership furnished to Bishop-Crown by the General
Partner;
(xvi) certain information provided by AmREIT's management
relating to the properties of the Partnerships
including projections of net operating income for the
year 1998 based on AmREIT management's review of the
properties and lease terms and credit worthiness of
the tenants of the Partnerships;
(xvii) the historical and projected results of operations of
AmREIT and historical and certain future earnings
estimate of selected companies which Bishop-Crown
deemed to be reasonably similar to AmREIT;
(xviii) the historical offering prices for the Common Shares
and the historical public trading prices of the
Common Shares of certain publicly traded companies
and publicly available financial, operating and stock
market data concerning certain companies engaged in
businesses Bishop-Crown deemed comparable to AmREIT
or otherwise relevant to its inquiry;
(xix) the financial terms of certain recent transactions
Bishop-Crown deemed relevant; and
(xx) such other financial information, analyses and
investigations as Bishop-Crown deemed relevant.
The financial forecasts provided to Bishop-Crown were the Partnerships'
property-by-property cash budget for 1998 and forecast of net operating income
and net cash flow for the five-year period 1998 to 2002, a pro forma combined
balance sheet for the Partnerships and AmREIT at December 31, 1997 and a pro
forma combined net operating income model for the Partnerships and AmREIT for
1998. Bishop-Crown discussed with senior management of AmREIT: (a) the
prospects for AmREIT's prospective financing, development and acquisition
activities in 1998 and 1999; (b) management's estimate of such business' future
financial performance; the anticipated financial impact on AmREIT's
financial performance of the Merger and AmREIT's transition to a
self-management structure; (d) the potential financial impact of the Merger on
AmREIT, including management's estimate of AmREIT's expenses related to the
Merger; and (e) such other matters as Bishop-Crown deemed relevant.
Bishop-Crown also visited selected properties owned by the Partnerships.
Bishop-Crown is not required to update its opinion. Management is not
aware of any event which has occurred after the date of Bishop-Crown's opinion
or of any significant changes to the information upon which it relied in giving
its opinion which would cause Bishop-Crown to alter its opinion regarding the
fairness of the Merger from a financial point of view.
Bishop-Crown assumed without independent verification that all financial
information provided by Mr. Taylor, management of the Partnerships and AmREIT,
including financial forecasts and projections, upon which it relied in
providing its opinion, was reasonably prepared and reflects the best current
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available estimates or future financial results and the condition of AmREIT and
the Partnerships; and that there has been no material change to the assets,
financial conditions, business or prospects of AmREIT or any of the
Partnerships since the date of the most recent financial statements made
available to it. Included in this financial information were projected
operating results of the combined Company and the Partnerships based on various
financial models assuming various rates of asset growth ranging from 10% to 50%
over various periods extending up to and including 2004. These financial
models incorporated numerous assumptions with respect to the real estate
industry performance, general business and economic conditions, future
conditions of the financial markets and the continuation of certain current
trends within the real estate industry. Most of these assumptions are beyond
the control of the Partnerships and AmREIT, and as predictions, no matter how
reasonable, are subject to the impact and influence of future events. Primary
among the assumptions made were that interest rates, rates of inflation, and
yields on leased properties would continue, overall, to compare with rates
currently available. The financial models also assumed that under current and
future AmREIT and Partnership investment lease provisions, same store net
operating income would increase at the average rate of 1.0% per annum, as
adjusted after the end of each fifth year of the lease. Bishop-Crown was not
engaged to opine and does not express any opinion as to any other aspect of the
Merger other than the fairness of the consideration to be paid by AmREIT and to
be received by AmREIT and its Shareholders from a financial point of view.
SHARE CONSIDERATION ANALYSIS. For purposes of its analysis of the
fairness of the transaction, Bishop-Crown valued the Shares by annualizing the
value of AmREIT's shares based on common stock multiples of annual dividends
and annual FFO. The appropriate range of multiples was determined by reference
to the reported multiples of publicly traded share prices to dividends and FFO
per share reported for the following REITs which Bishop-Crown deemed to be
comparable to AmREIT in terms of investment objectives and real estate
investments. These REITs (the "Comparable REITs") included Alexander Haagon
REIT, TriNet REIT, Boddie-Noell Properties, Inc., Burnham Pacific Properties,
Commercial Net Lease Realty, Franchise Finance Corp. of America, New Plan REIT,
Realty Income Corporation, Glimcher Realty Trust, Price REIT, Saul Center,
Excel Realty Trust, Inc., National Golf Properties, Macerich Company, Golf
Trust of America, Alexandria Real Estate Equities and Western Investment R.E.
Trust. This analysis resulted in multiples of dividends per share ranging from
11.30x to 32.46x, with a mean of 15.10x and a median of 13.81x, and multiples
of FFO per share ranging from 8.90x to 17.61x, with a mean of 12.02x and a
median of 11.22x. For the purposes of its analysis, Bishop-Crown focused on
the median dividend and FFO multiples which resulted in share prices equal to a
multiple of 15.10x dividends per share and 12.02x FFO per share. Bishop-Crown
noted that AmREIT has, through 1997, paid dividends in excess of FFO per share.
Bishop-Crown noted that the dividends per share paid by these REITs was less
than AmREIT's FFO per share except for Alexander Haagon (dividend equaled 105%
of FFO), National Golf Properties (dividend equaled 101% of FFO) and Saul
Centers (dividend equaled 102% of FFO). Bishop-Crown also noted that AmREIT
currently pays dividends at the rate of 113% of FFO. Bishop-Crown therefore
determined, for the purposes of comparison, to adjust AmREIT's dividend per
share to 100% of FFO or $0.69 per share as annualized at December 31, 1997.
Based on this analysis, Bishop-Crown determined, for the purposes of the
Merger, that the implied value of the Shares ranged from $8.29 to $9.53 per
share based on FFO per share of $0.69. Based on this implied range of Share
values, the value of the Shares offered by AmREIT to the Limited Partners for
the interest in the Partnership's properties (i.e., the "L.P. Value") would
have the following implied range of values.
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<TABLE>
<CAPTION>
NO. OF AmREIT IMPLIED VALUE
SHARES OFFERED ----------------------------
PARTNERSHIP FOR PROPERTIES LOW HIGH
----------- -------------- ----------- -----------
<S> <C> <C> <C>
FUND III 177,773 $ 887,580 $ 1,020,343
FUND IV 53,533 505,921 581,595
FUND V 43,897 381,660 438,747
FUND VI 30,514 266,274 306,103
FUND VII 108,137 843,201 969,325
FUND VIII 190,043 1,686,403 1,938,651
FUND GDYR 116,702 931,959 1,071,360
FUND IX 519,272 4,393,522 5,050,696
FUND X 1,112,420 9,230,835 10,611,563
FUND XI 679,872 5,511,874 6,336,328
--------- ----------- -----------
Total 2,972,163 $24,639,229 $28,324,711
</TABLE>
- ----------
Based on the foregoing, Bishop-Crown concluded that the Exchange Price of
$9.34 is supported by and confirmed by the implied value range.
Bishop-Crown also noted that, as there is currently no regular public
market for the Shares, such valuations may differ significantly, and without
limitation as to such higher or lower value as of the Closing Date. Thus,
Bishop- Crown did not recommend to AmREIT that any specific consideration would
constitute the appropriate amount or form of payment by AmREIT for the
Partnerships' properties, nor did Bishop-Crown recommend to AmREIT that any
specific consideration received by it or its shareholders would constitute
appropriate consideration to be received in the transaction.
Bishop-Crown also analyzed the value of the Partnerships pursuant to (I)
a discounted cashflow analysis, (ii) a comparable transaction analysis, and
(iii) a pro forma forecast analysis.
Discounted Cashflow Analysis. Under its discounted cashflow
analysis, Bishop-Crown valued the future stream of net cashflow (debt-free
earnings) that the Partnerships would realize if the Merger does not occur for
each of the years ended December 31, 1998, 1999 and 2000. Bishop-Crown then
assumed a sale of the Partnerships at the end of 2000. After analyzing
operating projections provided by management and the General Partner,
Bishop-Crown determined representative projected cashflow for the Partnerships
for the years 1998, 1999 and 2000, based on forecasted 1998, assuming timely
lease extensions in accordance with their terms. Bishop-Crown determined
representative projected net cashflow by taking into account the Partnerships'
historical and projected operating expenses for each year, which included the
Partnerships' general administrative expenses, including executive salaries.
Bishop-Crown assumed a combined income tax rate for the Partnerships of 40%.
Based on this analysis, Bishop-Crown calculated a range of equity values for
the Partnerships based upon:
(I) the present value of the net cashflows for each Partnership
for 1998, 1999 and 2000; and
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(ii) the present value of the estimated terminal value of the
Partnership properties, assuming that they were sold at the
end of the year 2000, based on annualized cashflow in 2001.
In applying its discounted cashflow analysis, Bishop-Crown assumed, among other
things, discount rates ranging from 12% to 20% (depending on the predictability
of the lease income and the time of receipt). Bishop-Crown also noted that
such discount rates are consistent with those used in cashflow analysis of
Partnerships in the comparable transactions section discussed below. For
valuation of the Partnership properties at the time of sale, Bishop-Crown used
terminal multiples of 6.0x to 9.0x, where the smaller end of the range is more
reflective of a greater discount rate range by reason of the more speculative
future sale prediction. Based on Bishop-Crown's quantitative judgments
concerning the specific risks associated with an investment and the properties,
the historical and projected operating performance of the properties, and the
increased speculative value of projections of future performance, the
relatively low average growth rate of 1.0% under the leases on the properties
and the relatively short 36 month projection period, Bishop-Crown focused on a
range of multiples from 7.5x to 8.0x. This analysis resulted in a range of
implied L.P. Values as follows:
<TABLE>
<CAPTION>
IMPLIED VALUE RANGE
---------------------------
PARTNERSHIP LOW HIGH
----------- ----------- -----------
<S> <C> <C>
FUND III $ 845,536 $ 892,886
FUND IV 310,247 332,809
FUND V 350,469 373,768
FUND VI 233,378 265,727
FUND VII 873,716 951,572
FUND VIII 1,540,753 1,614,122
FUND GDYR 1,026,105 1,117,314
FUND IX 4,751,927 5,139,839
FUND X 10,193,830 10,515,740
FUND XI 6,090,195 6,421,184
----------- -----------
Total $26,216,156 $27,624,961
</TABLE>
Comparable Transaction Analysis. Bishop-Crown reviewed
transactions by certain other publicly traded real estate companies, pursuant
to which they purchased assets of other real estate companies in exchange for
their securities, which Bishop-Crown considered had comparable terms and
conditions to those of the Merger. Among the comparable transactions analyzed
were those involving the following companies: American Pacific Properties,
Boddie-Noell Properties, Inc., Franchise Finance Corp. of America, Realty
Income Corporation, Security Capital Pacific Trust, and U.S. Restaurant
Properties Master Partnership. For each of these transactions, Bishop-Crown
analyzed the calculated multiples obtained by comparing prices paid by each of
these companies to acquire their respective adviser/manager with the aggregate
advisory fees earned by the adviser/manager during the last full fiscal year
prior to acquisition. From this analysis, Bishop-Crown confirmed the results
of its discounted cashflow analysis.
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Pro forma Merger Analysis. Bishop-Crown also analyzed the effect
of the Merger on the financial projections of the REIT and on the price to be
paid by the REIT for the Partnerships. For the purposes of this analysis,
Bishop-Crown considered the various financial models, including those assuming
scenarios for growth in AmREIT's real estate assets based on growth rates of
10%, 30% and 50% through 2004. Pursuant to these financial models,
Bishop-Crown compared anticipated FFO per share (I) of AmREIT without giving
effect to the Merger, (ii) of the Partnerships without giving effect to the
Merger; and (iii) of AmREIT and the Partnerships on a pro forma basis after
giving effect to the Merger. Pursuant to this analysis, Bishop-Crown observed
that under each of the resulting nine possible scenarios, the transaction could
be expected to be accretive to funds from operations for AmREIT in each year
for the seven year period ending December 31, 2004.
CONCLUSIONS. Based on the foregoing, Bishop-Crown determined that the
mean implied average value of the Shares offered to the Partnerships in the
Merger is within the range of concluded Partnership Values based on its
analysis. Bishop-Crown therefore concludes that the Merger of each or any
combination of the Partnerships with AmREIT for the consideration offered is
fair to AmREIT and its Shareholders from a financial point of view.
Bishop-Crown also considered the Partnerships' willingness to receive
consideration in the form of the Shares or Notes in payment for the
Partnerships. Bishop-Crown noted that AmREIT's net economic cost per share
will be, in general, less than the economic cost of cash payment because, in
general, AmREIT's transaction costs for the Merger are expected to be less than
its costs for equity or debt financing would be in the event cash
consideration were paid.
In considering the fairness of the Merger, Bishop-Crown also considered
the significant benefits to AmREIT which would result from the increased equity
and asset base which could result from the Merger. Bishop-Crown believes that
a large incremental growth in AmREIT's asset and equity base resulting from the
Merger will significantly facilitate additional growth by enhancing AmREIT's
ability to attract underwriters capable of placing significant public offerings
of AmREIT's Shares and the establishment of a secondary market for the Shares.
In arriving at its opinion, Bishop-Crown did not attribute any particular
weight to any analysis or factor considered by it, but rather made the
qualitative judgments as to the significance and relevance of each analysis and
factor, including its consideration and analyses of the projections.
Bishop-Crown believes that all of its analyses must be considered as a whole
and that selecting portions of its analyses, without considering all analyses,
could create an incomplete view of the processes underlying the analyses
undertaken by it in connection with its opinion. Furthermore, in its analyses,
Bishop-Crown made numerous assumptions with respect to the Partnerships,
AmREIT, general real estate industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Partnerships and AmREIT. The estimates contained in such
analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be more or less favorable than suggested by
such analyses. Additionally, analyses relating to the value of businesses or
securities are not appraisals. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Bishop-Crown's opinion and the
analyses and findings in connection therewith are not readily susceptible to
summary description. Therefore, Bishop-Crown believes its analyses must be
considered as a whole, and that considering any portion of its analyses or any
one or selected number of its conclusions, without considering its analyses and
conclusions in total, could create a misleading or incomplete view of the
process underlying its opinion.
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Bishop-Crown's analyses were prepared solely for the purposes of
providing its opinion to the Independent Director as to the fairness of the
consideration to be paid by AmREIT and to be received by AmREIT and its
Shareholders (other than Mr. Taylor) in the Merger, from a financial point of
view, and do not purport to be appraisals or to reflect the prices at which the
subject businesses or assets may be bought or sold.
Bishop-Crown's fairness opinion was one of many factors taken into
consideration by the Independent Directors in determining to approve the Merger
and to recommend approval of the Merger to the shareholders of AmREIT. The
foregoing summary does not purport to be a complete description of the analyses
performed by Bishop-Crown and is qualified by reference to its written opinion.
The preparation of its fairness opinion involves Bishop-Crown's determinations
as to the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances resulting from the Merger given the existence of facts and
conditions assumed.
Mr. Heilbron, founder and President of Bishop-Crown and a significant
Shareholder of Bishop-Crown's parent corporation, has personally known the
General Partner since 1987. During this time, an affiliate of Bishop-Crown,
PIM Financial Services, Inc., a registered broker-dealer, has provided
securities distribution services to AmREIT and other affiliates of the General
Partner. In November 1997, the Independent Directors engaged Bishop-Crown as a
financial adviser regarding AmREIT's acquisition of the Adviser and in
connection therewith, on January 15, 1998 rendered its opinion to the
Independent Directors that the recently completed Merger was fair to AmREIT and
its shareholders (other than the General Partner) from a financial point of
view. Bishop-Crown's engagement was not contingent upon its issuance of a
favorable opinion in connection with the Merger.
THE HOULIHAN FAIRNESS OPINIONS
GENERAL. The General Partner retained Houlihan on behalf of each
Partnership to render the Houlihan Fairness Opinions to each Participating
Partnership regarding the fairness, from a financial point of view, of the
consideration to be received by the Limited Partners of the Participating
Partnership in connection with the Merger. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the form or
amount of consideration to be received by the Limited Partners in connection
with the Merger, which consideration was determined through negotiations
between AmREIT and the General Partner. The General Partner retained Houlihan
to render its Fairness Opinions based upon Houlihan's experience in the
valuation of businesses and their securities in connection with mergers and
acquisitions, and valuation for corporate purposes especially with respect to
REITs and other real estate companies. Houlihan is a nationally recognized
investment banking firm that is continually engaged in providing financial
advisory services in connection with mergers and acquisitions, leveraged
buyouts, business valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructuring, and private placements of debt
and equity securities.
The General Partner engaged Houlihan on February 10, 1998. The General
Partner had, on behalf of each Participating Partnership, solicited proposals
from one other firm for the preparation of fairness opinions. The
consideration to be paid by AmREIT in the Merger consists solely of Shares or,
at the election of the individual Limited Partners, Notes. Houlihan
rendered an opinion as to the valuation
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of the Adviser in connection with the Adviser Acquisition for which opinion it
received a fee of $40,000. Houlihan has no material prior relationship with
the General Partner or his Affiliates. As compensation to Houlihan for its
services in connection with the Merger, the General Partner has agreed to pay
Houlihan an aggregate fee of $85,000. No portion of Houlihan's fee is
contingent upon the successful completion of the Merger. The General Partner
and each Partnership have also agreed to indemnify Houlihan and related persons
against certain liabilities, including liabilities under federal securities
laws, arising out of the engagement of Houlihan, and to reimburse Houlihan for
certain expenses.
HOULIHAN FAIRNESS OPINIONS. On ______________, 1998, Houlihan delivered
an oral indication that it would be able to deliver its written Fairness
Opinions to the General Partner to the effect that, as of March 31, 1998,
on the basis of its analysis summarized below and subject to the
limitations described below, the consideration to be received by
the Limited Partners of each Participating Partnership in connection with the
Merger was fair, from a financial point of view, to such Limited Partners. The
Fairness Opinions do not constitute a recommendation to any Limited Partner as
to how any such Limited Partner should vote on the Merger. Houlihan has no
existing contractual obligation to update its Fairness Opinions.
THE FULL TEXT OF THE HOULIHAN FAIRNESS OPINIONS, WHICH SET FORTH,
AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX 5.
TO THIS PROSPECTUS. THE LIMITED PARTNERS ARE URGED TO READ THE
OPINION IN ITS ENTIRETY.
In arriving at its Fairness Opinions, Houlihan: (I) reviewed the annual
reports to partners for the Partnerships for each of the five fiscal years (or
since inception) to December 31, 1996; (ii) reviewed AmREIT's annual reports to
shareholders on Form 10-KSB and Form 10-K for the fiscal years ended December
31, 1997 and 1996, respectively; (iii) reviewed the draft Merger Agreement,
dated June ____, 1998 and the July 8, 1998 draft of this Prospectus;
(iv) met with certain members of the senior management of AmREIT and
the General Partner to discuss the Partnerships and AmREIT's operations,
financial condition, future prospects, and projected operations and held
discussions with representatives of the Partnerships and AmREIT with
respect to certain matters; (v) reviewed the unaudited balance sheet
dated December 31, 1997 and the rental income statements for the combined
Partnerships for the years ended December 31, 1997 and 1996; (vi) visited
certain facilities and business offices of AmREIT and the Partnerships, and
certain real property owned by the Partnerships; (vii) reviewed forecasts and
projections prepared by management of the General Partner and AmREIT with
respect to the Partnerships' properties for the years ended 1997 through 2007;
(viii) reviewed the historical offering prices for AmREIT's securities; (ix)
reviewed certain other publicly available financial data for certain companies
that Houlihan deemed comparable to the Partnerships and AmREIT and publicly
available prices and premiums paid in other transactions that it considered
similar to the Merger; and (x) conducted such other studies, analyses and
inquiries as it deemed appropriate.
Houlihan did not, and was not requested by the General Partner, to make
any recommendations as to the form or amount of consideration to be paid to the
Limited Partners in connection with the Merger. Houlihan was not asked to opine
on and did not express any opinion as to (I) legal or tax consequences of the
Merger, including but not limited to tax consequences to the Limited Partners;
(ii) whether any Limited Partner should elect to receive Notes rather than
Shares in the Merger; (iii) the public market values or realizable value of the
Shares or the prices at which the Shares may trade in the future following the
Merger if and when a public trading market is established for the Common
Shares; (iv) the fairness advisability or desirability of alternatives to the
Merger; (v) the potential capital structure of AmREIT or its impact on the
financial performance of the Shares or Notes; or (vi) the fairness of any
aspect of the Merger not expressly addressed in the Houlihan Fairness Opinions,
including the fairness of the Merger as a whole. Houlihan's opinion as to each
Partnership does not depend on the participation of any one or a combination of
other Partnerships. Houlihan did not perform an independent appraisal of the
assets and liabilities of the Partnerships.
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Although the General Partner and AmREIT advised Houlihan that certain
assumptions were appropriate in their view, no restrictions or limitations were
imposed by the General Partner upon Houlihan with respect to its investigation
or the procedures followed by Houlihan in rendering its fairness opinion.
Houlihan's Fairness Opinions are not intended to be and do not constitute a
recommendation to any Limited Partner as to whether to accept the
consideration to be received by such Limited Partner in connection with
the Merger (whether in the form of Shares or Notes or to vote in favor
of the Merger). It should be noted that the aggregate value of the
consideration that may be received by each Limited Partner in connection with
the Merger (including any cash consideration in lieu of fractional shares to be
received by the Limited Partners) is fixed. The ultimate value actually
received by each Limited Partner at the time of consummation of the Merger will
vary depending on the market price of the Shares at such time.
Houlihan relied upon and assumed, without independent verification, that
the financial forecasts and projections provided to it have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Partnerships and that there has been no
material change in the assets, financial condition, business or prospects of
each Partnership since the date of the most recent financial statements made
available to it.
Houlihan did not independently verify the accuracy and completeness of
the information supplied to it with respect to the Partnerships and did not
assume any responsibility with respect to such information. Houlihan has not
made any physical inspection or independent appraisal of any of the properties
or assets of the Partnerships.
Houlihan's analysis of each Partnership took into consideration the
income- and cash-generating capability of that Partnership. Typically, an
investor contemplating an investment in an enterprise with income- and
cash-generating capability similar to the Partnerships will evaluate the risks
and returns of its investment on a going concern basis. Accordingly, after due
consideration of other appropriate and generally accepted valuation
methodologies, the value of each Partnership has been developed primarily on
the basis of capitalization of net operating cash flow and discounted cash flow
approaches.
All valuation methodologies that estimate the worth of an enterprise as a
going-concern are predicated on numerous assumptions pertaining to prospective
economic and operating conditions. Houlihan's Opinions are necessarily
based on business, economic, market and other conditions as they
exist and can be evaluated by it at the valuation date. Unanticipated events
and circumstances may occur and actual results may vary from those assumed.
Any such variations may be material.
Houlihan used several methodologies in arriving at its Fairness Opinions.
Each methodology provided an estimate as to the L.P. Value for each Partnership.
The L.P. Value of the limited partnership interest in each Partnership and this
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provides a basis of comparison to the consideration offered in the Merger.
Several of the analyses conducted by Houlihan also provided an estimate
as to the value of the general partners' interests in the Partnership
(the "General Partner Value").
Valuation of the Partnerships. In valuing the Partnerships,
Houlihan performed the following analyses with respect to each Partnership.
Net Sale Approach. Pursuant to the Net Sale Approach which
Houlihan analyzed the value of the properties of each Partnership (and any
subject liabilities) under an orderly sale/liquidation scenario. This approach
allowed Houlihan to determine the net equity value of each Partnership by first
determining the value of such Partnership's assets and then subtracting the
value of the Partnership's liabilities. In order to arrive at the value of the
Partnership's assets, Houlihan utilized capitalization rates of Net Operating
Income ("NOI") of the properties of each Partnership as well as multiples of
the square footage of each partnership to arrive at a value for each
Partnership's real property. Houlihan then aggregated the resulting property
values for each Partnership to arrive at an aggregate value of such
Partnership.
Capitalization rates utilized in the Net Sale Approach were determined
based upon (I) comparable sales data provided by the General Partner; (ii)
statistics from the National Real Estate Index, an independent organization
that compiles pricing data from real estate transactions; and (iii) certain
publicly available information on assets similar to the Partnerships'
properties. Additionally, on a property-by-property basis, a number of
characteristics and financial statistics were considered, including property
classification, NOI and revenue growth, total revenues, profitability, and
property's relative size. Moreover, the market and location of the property
were considered. In sum, Houlihan selected capitalization rates and applied
what it believes to be the appropriate capitalization rate to each property's
NOI. The Net Sale Approach generally utilized the higher of each property's
actual or projected NOI for the annual periods selected. The NOI for certain
properties were adjusted to reflect normal income streams for such properties
which were newly constructed or had recently experienced material change of
circumstances such as the addition or departure of a major tenant or a
significant renovation.
Applying those selected capitalization rates to each property's
normalized NOI resulted in an aggregate value for each property. Property
values were then adjusted for reasonable real estate transaction costs (i.e.,
assumed brokerage fees and commissions) and any contractual fees due to the
General Partner in the event of a property sale. The net result for each
property owned by each Partnership was then aggregated to arrive at an
aggregate property value for each Partnership based upon the Net Sale Approach.
Each Partnership's aggregate property value was adjusted to reflect the capital
structure of the relevant assets, the working capital assets and liabilities of
the Partnership, and any excess cash or other liabilities. The General Partner
then divided the resulting value among the Limited Partners and General Partner
of each Partnership based upon the rights and privileges of the Partnership
Agreement.
Income Approach. Like the Net Sale Approach, this approach
considered the capitalization rates and multiples of square footage to arrive
at the estimated value of each Partnership's underlying real properties.
However, rather than assuming a sale of such real properties, the Income
Approach did not include a reduction in relative values for the transaction
costs associated with the sale of the properties. Thus, the Income Approach
utilized the aggregate NOI and square footage for each property, as determined
in the property sale analysis, and appropriate capitalization rates and square
foot multiples to
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determine the aggregate value of each Partnership. The resulting value was then
divided among the Limited Partners and General Partner of each Partnership
based upon the rights and privileges of the Partnership Agreement.
Unit Yield Approach. Under the Unit Yield Approach, the L.P.
Value was estimated by calculating capitalization rates for alternative
investments such as publicly traded real estate investment trusts and privately
held real estate companies whose securities sales are periodically monitored in
a publication entitled the "Partnership Spectrum." The capitalization rates for
the indicated alternative investments ranged between approximately 5.0% to
10.0%. Utilizing these capitalization rates as a proxy for the required return
on the Partnerships' securities and then applying the range of required returns
to the Partnerships' Limited Partner distributions as a perpetual flow resulted
in an indication of the value of the Limited Partners' aggregate interests in
each Partnership.
Conclusion. The aforementioned approaches provided Houlihan with
a range of values for the aggregate limited partner interests of each
Partnership. Houlihan then considered, among other things I) the premiums paid
in transactions involving entities such as the Partnerships and the Merger as
proposed; and ii) the premiums above net asset value exhibited in secondary
market trades of partnership interests (as reported in such publications as the
"Partnership Spectrum") for control block acquisitions and partnerships with
similar assets. Consideration of such premiums resulting in Houlihan applying
premiums of five percent to the aforementioned range of aggregate limited
partner values.
Valuation of Consideration Offered. Houlihan then considered the
value of the Shares and/or Notes to be received by the Limited Partners in
connection with the Merger. Houlihan considered AmREIT's pro forma net
operating income and, in a manner similar to the aforementioned sale and income
approach, Houlihan capitalized such net operating income to arrive at a pro
forma net asset value for AmREIT. (Houlihan did not assume any liquidation
costs in its pro forma valuation.) Houlihan then added the value of AmREIT's
advisory business, based upon AmREIT's purchase price for the Adviser in the
Adviser Acquisition, to AmREIT's net asset value. This resulted in a total
valuation and a per share value of AmREIT.
Houlihan then multiplied the number of Shares to be received by each
Partnership by the estimated valuation of the Shares to arrive at the valuation
of the consideration to be received by the Limited Partners of each
Partnership.
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The foregoing summaries describe the material points of more detailed
analyses performed by Houlihan in connection with rendering the Houlihan
Fairness Opinions. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and application
of those methods to the particular circumstances and is, therefore,
not readily susceptible to summary description. In rendering its
Fairness Opinions, Houlihan did not attribute any particular weight to any
analysis or factor considered by it but rather made the available judgments as
to the significance and relevance of each analysis and factor. Accordingly,
Houlihan believes that its analyses and the summary set forth herein must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses and factors, or portions of this summary, could create
an incomplete view of the processes underlying the analyses set forth in the
Houlihan Fairness Opinions. In its analysis, Houlihan made numerous assumptions
with respect to the Partnerships, general real estate industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond its control and beyond the control of the
Partnerships. The estimates contained in such analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be more or less favorable than suggested by such analyses. Additionally,
analyses relating to the value of businesses or securities are not appraisals.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
CONDITIONS AND LIMITATIONS. The conclusions resulting from the
above-described analyses indicated an L.P. Value for the Partnerships that was
generally lower than and not greater than the value of the Shares to be
received as consideration by its Limited Partners in connection with the
Merger, leading Houlihan to conclude that the consideration to be paid to the
Limited Partners of each Partnership in connection with the Merger is fair to
the aggregate Limited Partners of each Partnership from a financial point of
view.
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The foregoing analyses required studies of the overall market, economic
and industry conditions in which the Partnerships and AmREIT operate, the
Partnerships' and AmREIT's operating results, and the Partnerships'
distributions to the Limited Partners. Research into, and consideration of,
these conditions were incorporated into the analyses.
Houlihan's Fairness Opinions are based on the business, economic, market
and other conditions as they existed as of December 31, 1997. In rendering its
opinion, Houlihan relied upon and assumed, without independent verification,
the accuracy and completeness of the financial and other information provided
to Houlihan by the General Partner and AmREIT was reasonably prepared and
reflect the best current available estimates of the financial results and
condition of the Partnerships and AmREIT. Houlihan relied on the assurance of
the General Partner that any financial projections or pro forma statements or
adjustments provided to Houlihan were in the judgment of the General Partners
and AmREIT reasonably prepared or adjusted on bases consistent with actual
historical experience or reflecting the best currently available estimates and
good faith adjustments; that no material changes have occurred in the
information reviewed between the date the information was provided and the
date of the Houlihan Fairness Opinions; and that the General Partners and
AmREIT are not aware of any information or facts regarding the General
Partners and AmREIT or the Partnerships that would cause the information
supplied to Houlihan to be incomplete or misleading in any material respect.
Houlihan did not independently verify the accuracy or completeness of
the information supplied to it with respect to the Partnerships or AmREIT
and does not assume responsibility for the accuracy or completeness of
such information. Except as set forth above, Houlihan did not make any
physical inspection or independent appraisals of the properties or assets
of the Partnerships or AmREIT.
AMREIT PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Balance Sheet of AmREIT as of March 31, 1998, has
been prepared as if each of the transactions had occurred as of March 31, 1998:
(I) the issuance of 213,260 Initial Shares pursuant to the Adviser Acquisition;
(ii) the Merger and the Related Transactions. The following Pro Forma
Statements of Operations of AmREIT for the year ended December 31, 1997 and
for the three months ended March 31, 1998 have been prepared as if each of the
transactions had occurred as of January 1, 1997.
The Pro Forma Financial Information of AmREIT has been prepared using the
purchase method of accounting whereby the assets and liabilities of the
Partnerships are allocated based upon estimated fair market value, based upon
preliminary estimates, which are subject to change as additional information is
obtained. The allocations of purchase costs are subject to final determination
based upon estimates and other evaluations of fair market value. Therefore, the
allocations reflected in the following Pro Forma Financial Information may
differ from the amounts ultimately determined.
The Pro Forma Financial Information is presented for informational
purposes only and is not necessarily indicative of the financial position or
results of operations of AmREIT that would have occurred if such transactions
had been completed on the dates indicated, nor does it purport to be indicative
of future financial position or results of operations. In the opinion of the
AmREIT management, all material adjustments necessary to reflect the effect of
these transactions have been made. The Pro Forma Statements of Operations for
the year ended December 31, 1997 and for the three months ended March 31, 1998
do not necessarily indicative of the results of operations to be expected for
the year ending December 31, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AMREIT
The following discussion should be read in conjunction with the
Consolidated Financial Statements of AmREIT and accompanying Notes included
elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
The initial issuance of 20,001 shares of stock for $200,010 was to H.
Kerr Taylor. On March 17, 1994, AmREIT commenced an offering of 2,000,000
Shares of Common Stock, together with 1,000,000 Warrants (collectively
"Securities"). Until the completion of the offering in March 1996, the
Securities were offered on the basis of two (2) Shares of Common Stock and one
(1) Warrant for a total purchase price of $20.00. The Shares and Warrants were
separately transferable by an investor. Each Warrant entitled the holder to
purchase one Share for $9.00 until March 15, 1998. As of December 31, 1997,
501,583 Warrants were outstanding. The offering period for the initial public
offering terminated on March 15, 1996 with gross proceeds totaling $10,082,520
(1,008,252 shares). On April 30, 1996, AmREIT commenced a follow-on offering
of up to $29,250,000 (2,853,659 shares) of additional shares of its Common
Stock. The offering terminated on May 22, 1998. As of December 31, 1997,
gross proceeds had been received for $8,606,419 (839,960 shares) in this second
offering bringing the total gross proceeds to $18,888,949 (1,868,213 shares).
In December 1997, AmREIT entered into an amended and restated unsecured
revolving credit agreement (the "Amended Credit Agreement") with a borrowing
capacity up to $15,000,000 through February 1999. The actual amount available
to AmREIT is dependent on certain covenants such as the value of unencumbered
assets. The Amended Credit Agreement currently bears interest at 2.00% over
varying London Interbank Offered Rates and it is being used to acquire
additional properties. As of December 31, 1997, $5,981,489 was outstanding
under the Amended Credit Agreement. These funds were advanced to third parties
and entities with common management to develop properties that will be acquired
by AmREIT upon completion.
AmREIT has an investment strategy of acquiring properties and leasing
them under net-leases to corporations having a demonstratively adequate net
worth in this opinion of management. Investments in properties under these
terms minimizes AmREIT's operating expenses. AmREIT believes that the leases
will continue to generate cash flow in excess of operating expenses. Due to low
operating expenses and ongoing cash flow, AmREIT does not believe that large
working capital reserves are necessary at this time. In addition, because all
leases of AmREIT's Properties are and are intended to continue to be on a
net-lease basis, it is not anticipated that a large reserve for maintenance and
repairs will be necessary. AmREIT intends to distribute a significant portion
of its funds from operations unless it becomes necessary to maintain additional
reserves.
As of March 31, 1998, the Company had acquired seven Properties directly
and six Properties through joint ventures with entities with common management
and had invested $14,649,515, exclusive of any minority interests, including
certain acquisition expenses related to the Company's investment in these
properties. These expenditures resulted in a corresponding decrease in the
Company's liquidity.
Until the Company acquires Properties, proceeds are held in short-term,
highly liquid investments that the Company believes to have appropriate safety
of principal. This investment strategy has allowed,
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and continues to allow, high liquidity to facilitate the Company's use of these
funds to acquire properties at such time as properties suitable for acquisition
are located. At March 31, 1998, the Company's cash and cash equivalents
totaled $1,295,473.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to inflation as
well as increases in the Consumer Price Index (C.P.I.), may contribute to
capital appreciation of AmREIT Properties. These factors, however, also may
have an adverse impact on the operating margins of the tenants of the
Properties.
AmREIT has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue. The Year
2000 Issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. AmREIT's hardware and software are believed to be Year
2000 compliant. Accordingly, AmREIT does not expect to incur any material
costs in connection with the Year 2000 Issue.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997. During the three months
ended March 31, 1998 and March 31, 1997, the Company owned and leased 12 and 8
properties, respectively. During the three months ended March 31, 1998 and
March 31, 1997, the Company earned $521,112 and $337,451, respectively, in
rental income from operating leases and earned income from direct financing
leases. This 54 percent increase in rental income and earned income is
primarily attributable to rental income earned on the four additional
properties owned during 1998.
During the three months ended March 31, 1998 and March 31, 1997, the
Company's expenses were $368,307 and $92,361, respectively. The $275,946
increase in expenses is primarily attributable to $182,322 of costs incurred
during the first quarter of 1998 related to potential acquisition costs of the
proposed acquisition of the Company's adviser. The increase is also
attributable to (I) a $37,249 increase in general operating and administrative
expenses primarily attributable to an increase in legal fees and director fees,
(ii) a $28,512 increase in depreciation as a result of the depreciation of the
additional properties owned during 1998, and (iii) a $23,895 increase in
interest expense as a result of higher average borrowing levels.
Funds from operations (FFO) increased $66,895 or 32% to $276,499 for the
three month period ended March 31, 1998 from $209,604 for the three month
period ended March 31, 1997. The Company has adopted the National Association
of Real Estate Investment Trusts (NAREIT) definition of FFO. FFO is calculated
as net income (computed in accordance with generally accepted accounting
principles) excluding gains or losses from sales of property, depreciation and
amortization of real estate assets, and nonrecurring items of income or
expense. For purposes of the table below, FFO excludes the nonrecurring
potential acquisition costs. FFO is generally considered by industry analysts
to be the most appropriate measure of performance and does not necessarily
represent cash provided by operating activities in accordance with generally
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. Management considers FFO an appropriate measure
of performance of an equity REIT because it is predicated on cash flow
analysis. The Company's computation of FFO may differ from the methodology for
calculating FFO utilized by other equity REIT's and, therefore, may not be
comparable
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to such other REIT's. FFO is not defined by generally accepted accounting
principles and should not be considered an alternative to net income as an
indication of the Company's performance.
Below is the reconciliation of net income to funds from operations for
the three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net Income $ 37,228 $181,167
Plus Depreciation 56,949 28,437
Plus Potential Acquisition Costs 182,322 --
-------- --------
Total Funds From Operations $276,499 $209,604
</TABLE>
Cash flows from operating activities, investing activities, and financing
activities for the three months ended March 31 are presented below:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Operating Activities $ 206,316 $ 305,514
Investing Activities (3,760,599) (82,443)
Financing Activities 3,448,016 1,051,808
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996. During the years ended December
31, 1997 and 1996, AmREIT owned and leased 11 and 8 properties, respectively.
During the years ended December 31, 1997 and 1996, AmREIT earned $1,556,815 and
$924,788, respectively, in rental income from operating leases and earned
income from direct financing leases. The 68 percent increase in rental income
and earned income during 1997, as compared to 1996, is primarily attributable
to rental income earned on the three properties acquired during 1997. In
addition, rental and earned income increased during 1997 as a result of the
fact that the three properties acquired during 1996 were operational for a full
fiscal year in 1997. Rental and earned income is expected to increase in 1998
as AmREIT acquires additional properties and due to the fact that the three
properties acquired during 1997 will contribute to AmREIT's income for a full
fiscal year in 1998.
During the years ended December 31, 1997 and 1996, AmREIT's expenses were
$716,627 and $302,857, respectively. The $413,770 increase in expenses is
primarily attributable to $282,890 of costs incurred during 1997 in relation to
potential acquisition costs related to the proposed acquisition of AmREIT's
Adviser. On June 5, 1998, the Company acquired its former external Adviser.
The increase is also attributable to (I) a $68,594 increase in reimbursements
and fees to a related party as a result of increased rental income for the year
ended December 31, 1997, (ii) a $28,050 increase in general operating and
administrative expenses primarily attributable to an increase in legal fees and
director fees since more director meetings were held during 1997, and (iii) a
$32,271 increase in depreciation as a result of the depreciation of the
additional properties acquired during 1997 and a full year of depreciation on
the properties acquired during 1996.
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Funds from operations (FFO) increased $311,211 or 47% to $967,762 in 1997
from $656,551 in 1996. AmREIT has adopted the National Association of Real
Estate Investment Trusts (NAREIT) definition of FFO. FFO is calculated as net
income (computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of property, depreciation and amortization
of real estate assets, and nonrecurring items of income or expense. For
purposes of the table below, FFO excludes the nonrecurring potential
acquisition costs. FFO is generally considered by industry analysts to be the
most appropriate measure of performance and does not represent cash provided by
operating activities in accordance with generally accepted accounting
principles and are not necessarily indicative of cash available to meet cash
needs. FFO is not defined by generally accepted accounting principles.
Below is the reconciliation of net income to funds from operations:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net Income $538,857 $542,807
Plus Depreciation 146,015 113,744
Plus Potential Acquisition Costs 282,890 ---
Total Funds From Operations 967,762 656,551
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995. During 1996, AmREIT acquired
three Properties at an aggregate price of $3,037,951 and also received
$3,346,249 in net proceeds from the public offering. Both of these factors
contributed to an increase in total revenues to $1,062,316 in 1996 from
$623,084 in 1995. Rental activities account for $429,651 of this increase,
while the remaining $9,581 came from interest income. Income from rental
activities included income from the three new acquisitions in 1996 and also
included a full year of income from two Properties which were acquired in the
third quarter of 1995. Interest income resulted from earnings on AmREIT's
short-term money market investments.
AmREIT's operating expenses decreased from $367,260 in 1995 to $302,857
in 1996 primarily from a decrease in executive compensation of $150,000
partially offset by an increase in administrative expenses and depreciation
which resulted from the overall increase in the activity of the AmREIT.
MATERIAL FEDERAL INCOME TAX ASPECTS
GENERAL
The following discussion summarizes the material provisions of the
federal income tax treatment applicable to AmREIT and to the Shareholders in
connection with their ownership of securities of AmREIT. Rushall & McGeever,
APC, has acted as special counsel to AmREIT in connection with the preparation
of this Prospectus. The discussion relates only to the federal income tax
treatment of AmREIT and its Shareholders and is generally directed to the
federal income tax treatment of an individual who is a United States resident
and subject to regular federal income tax. The following discussion does not
include the possible application of the federal income tax law to individual
Shareholders. The discussion does not address all aspects of federal income
taxation that may be relevant to particular investors in light of their
personal investment or tax circumstances, or to investors who are subject to
special treatment under federal income tax laws.
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AmREIT intends to continue to conduct its operations in a manner that
will permit it to qualify to be treated as a REIT for federal income tax
purposes after giving effect to the Merger. AmREIT has not requested a ruling
from the IRS as to the qualification of AmREIT as a REIT. AmREIT, however, will
receive, as of the Closing Date of the Merger, an opinion from Deloitte &
Touche LLP ("Deloitte") that, for federal income tax purposes, based on current
law or interpretations thereof, after giving effect to the Merger, AmREIT's
proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Internal
Revenue Code. Deloitte will not render an opinion, except as specifically
referenced, on the other issues discussed under this section of the Prospectus
because of the prospective or hypothetical nature of the facts and
circumstances associated with such an opinion as, for example, the tax
treatment of distributions to specific shareholders. Deloitte's opinion will
represent only its best professional judgment as to the most likely outcome of
an issue if the matter were litigated and has no binding effect on the service
or the courts. There is, therefore, no assurance that the conclusions
expressed below would be sustained by a court if contested, or that future
legislative or administrative changes or court decisions may not significantly
modify the statements and opinions expressed herein. Any such future changes
could be retroactive with respect to any transactions effective prior to the
time they are made.
The Code provides tax treatment for organizations that principally invest
in real estate or real estate assets (including mortgages secured by real
property) which meet certain conditions imposed by Code Sections 856-860 and
elect to be taxed as a REIT. In general, a REIT will not be taxed at the
corporate level on its net income which is currently distributed to its
Shareholders. Thus, taxation as a REIT will substantially eliminate the
"double taxation" (tax at both the corporate and shareholder levels) typically
associated with corporations. If AmREIT fails to continue to qualify as a REIT
in any year, it would likely be taxed as a domestic corporation and would not
receive a deduction for dividends paid to the Shareholders. In such event, the
Shareholders would be taxed in the same manner as shareholders of ordinary
domestic corporations, and AmREIT may be subject to significant tax
liabilities, which would reduce the amount of cash available for dividends to
the Shareholders.
REQUIREMENTS FOR QUALIFICATIONS AND TAXATION AS A REIT
AmREIT presently qualifies as a REIT. Deloitte will render its opinion
that, assuming that AmREIT operates in accordance with the method of operation
described herein, including the representations of the Directors that they
intend to continue to comply with the requirements of Code Sections 856-860, as
amended, AmREIT will continue to qualify for taxation as a REIT. However, no
opinion can be given that AmREIT will actually satisfy REIT requirements in the
future since they will depend substantially on future events. Further, AmREIT
has not, and does not intend to, request a ruling from the IRS as to its tax
status.
To continue to qualify as a REIT, AmREIT must, among other things, meet
each of the requirements discussed below.
OWNERSHIP OF SHARES. A REIT's Shares must be held by a minimum of 100
persons for at least 335 days in each of its 12-month taxable years. At all
times during the last half of each of its taxable years, no more than 50% in
value of the Shares may be owned, directly or indirectly, actually or
constructively, by five or fewer individuals. To aid in meeting these
requirements, AmREIT is given the power in its Bylaws to prohibit a transfer of
Shares which would produce a violation of these requirements. In determining
Share ownership, the attribution rules provided in the Code will, in general,
apply. In
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applying the attribution rules to determine indirect ownership of a REIT's
Shares, attribution to an individual of Shares owned by or for the individual's
partner is ignored.
NATURE OF ASSETS; DIVERSIFICATION. AmREIT must meet two tests designed to
insure that its investments are primarily in real estate assets (including
mortgages secured by real estate), cash, or government securities and that its
other assets are diversified. In general, at the end of each fiscal quarter,
at least 75% of the value of a REIT's total assets must be real estate assets,
cash and cash items (including receivables), and government securities. AmREIT
generally may not own securities of any one non-governmental issuer which, in
the aggregate, exceed 5% of the value of AmREIT's total assets. Also, AmREIT
may not own more than 10% of the outstanding voting securities of any one
issuer. For the purposes of so evaluating AmREIT's assets, any AmREIT
investments in a partnership or joint venture will be deemed to be a
proportionate investment in the assets of such partnership or joint venture.
Stock or debt instruments purchased with new equity capital are treated as real
estate assets for the purposes of the 75% Assets Test. See the discussion
under "New Equity Capital" below.
AmREIT will own 9% of the voting stock and 100% of the non-voting stock
of a non-REIT subsidiary. AmREIT believes its pro rata share of the value of
the securities of the non-REIT subsidiary do not exceed 5% of the total value
of its assets. There can be no assurance, however, that the IRS will not
contend either that the value of the securities of the non-REIT subsidiary held
by AmREIT exceeds the 5% value limitation or that non-voting stock of the
non-REIT subsidiary should be considered "voting stock" for this purpose.
SOURCES OF INCOME. To qualify as a REIT, AmREIT must, effective January
1, 1998, meet the two separate income tests described below. These tests are
designed to ensure that a REIT's income is derived principally from passive
real estate investments. In evaluating a REIT's income, investments in a
partnership or joint venture will be treated as though the REIT is receiving
its proportionate share of the income earned by such partnership or joint
venture and, in the REIT's hands, any such income will retain the character
that it would have in the hands of the partnership or joint venture.
The 75% Source of Income Test. Under this requirement, at least
75% of the Company's income must be derived from the following sources:
o Interest on monetary obligations secured by real property,
including any income derived from a shared appreciation
provision which is treated as gain recognized on the sale of
the secured property. A "shared appreciation provision" is
any interest that is in connection with an obligation that
is held by AmREIT and secured by an interest in real
property, which provision entitles AmREIT to receive a
specified portion of any gain realized on the sale or
exchange of such property (or any gain that would be
realized if the property were sold on a specified date).
For the purpose of meeting the income requirements, AmREIT
will be treated as holding the secured property for the
period during which it held the shared appreciation
provision (or, if shorter, the period during which secured
property was held by the person holding such property).
AmREIT does not intend to make substantial investments in
such mortgages.
o Rents from real property, except for (a) rent based on the
income or profits derived from the property, (b) rent paid
by a person or corporation in which AmREIT owns a 10% or
greater interest, and amounts received with respect to
real or personal property
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if AmREIT furnishes services to tenants, or manages or
operates the property, other than through an "independent
contractor" from whom AmREIT does not derive any income.
Substantially all of the income received by AmREIT is
expected to be derived from rents from real property.
o Gain from the sale or other disposition of real property
(including interests in mortgages) which is not property
described in Code Section 1221(1). Section 1221(1) property
("dealer property") is stock in trade, inventory, and
property held primarily for sale to customers in the
ordinary course of the company's trade or business. In
general, income from the sale of dealer property does not
qualify under this source of income test because it is
active income. AmREIT does not expect to have significant
amounts of such gain.
o Dividends or other distributions on shares in other REITs
(except a qualified REIT subsidiary), as well as gain from
the sale of such shares. AmREIT does not expect to invest in
any other REIT.
o Abatements and refunds of real property taxes.
o Income and gain derived from "foreclosure property."
"Foreclosure property" includes real property and related
personal property that AmREIT elects to treat as foreclosure
property under prescribed procedures. See "GLOSSARY`."
Under this category, a REIT may receive, for a limited
period, income from a property that it acquired
involuntarily that otherwise would not qualify because it is
active income.
o Commitment fees received in consideration for AmREIT's
agreement to make secured loans or purchase or lease real
property.
For the purposes of the foregoing, an "independent contractor" is
any person who does not own, directly or indirectly, 35% of AmREIT's Shares,
and, in general, which is not 35% or more owned, directly or indirectly, by any
person or persons owning 35% or more of AmREIT's Shares. Attribution rules
apply for such determination so that the Shares of two or more persons may be
aggregated in making the determination. The contractor must be adequately
compensated for any services performed for AmREIT. Compensation determined by
reference to an unadjusted percentage of gross rents will generally be
considered to be adequate where the percentage is reasonable, taking into
account the going rate of compensation for managing similar property in the
same locality, the services rendered and other relevant factors. An independent
contractor may not be an employee of AmREIT (i.e., the manner in which the
contractor carries out its duties as independent contractor must not be subject
to the control of AmREIT).
To the extent that services (other than those customarily
furnished or rendered in connection with the rental of real property) are
rendered to the tenants of the property, they must, in general, be provided by
an independent contractor and the cost of the services must be borne by the
independent contractor or a separate charge on the tenants must be made for
such services. The amount of the separate charge must be received and retained
by the independent contractor and the independent contractor must be adequately
compensated for its services. However, REITs may perform for themselves those
services that would not result in the receipt of "unrelated business income" if
performed by certain tax exempted
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entities, without using an independent contractor. For its 1998 taxable year
and thereafter, under the 1997 Act, AmREIT is permitted to receive up to 1% of
the gross income from each property from the provision of non customary
services and still treat all other amounts received from such property as
"rents from real property." AmREIT believes that all services provided to
tenants by AmREIT will be considered "usually or customarily rendered" in
connection with the rental of retail space for occupancy, although there can be
no assurance that the IRS will not contend otherwise.
A REIT receiving new capital and investing it in stock or bonds,
may treat interest, dividends or gains from the sale of such investments as
income for the purpose of the 75% source of income test. "New capital" is any
amount received by a REIT in exchange for its stock (other than pursuant to a
dividend reinvestment plan) or in a public offering of debt obligations of
AmREIT with maturities of at least five years. However, this provision is
applicable only to income received for the one year period beginning on the
date that AmREIT received such capital. In addition, during that period,
stocks or bonds bought with new capital will be treated as "real estate assets"
for the purposes of the 75% test (as explained, the 75% test requires that 75%
or more of the value of a REIT's total assets must be real estate assets, cash,
cash items and government securities).
The 95% Source of Income Test. Under this requirement, AmREIT
must derive at least 95% of its gross income from the sources listed under the
75% source of income test and from dividends from companies other than REITs,
interest on obligations that are not secured by real property or gains from the
sale or disposition of stock or securities (other than interest in qualified
REITs), which is not Code Section 1221(1) property ("dealer property").
For the purposes of determining whether AmREIT complies with the
75% and 95% source of income tests detailed above, "gross income" does not
include gross income from prohibited transactions. See "GLOSSARY" and the
discussion of prohibited transactions below.
The Code provides certain relief from this requirement when a REIT
has certain types of income that are not accompanied by the receipt of cash.
However, AmREIT must pay tax on the amounts not distributed (Code Sections
857(a) and (e)).
Should AmREIT fail to satisfy either of the 75% or the 95% source
of income tests for any taxable year, it will be subject to a 100% excise tax
on the greater of the amount by which it fails either test notwithstanding
whether AmREIT qualifies under the relief provision described below. However,
it may still qualify as a REIT if (I) its failure to comply was due to
reasonable cause and not to willful neglect; (ii) AmREIT reports the name and
amount of each item of its income included in the tests on a schedule attached
to its tax return; and (iii) any incorrect information is not due to fraud with
intent to evade tax.
For tax years commencing prior to January 1, 1998, AmREIT was also
required to satisfy the 30% source of income test. Under this requirement,
AmREIT was required to derive less than 30% of its gross income from the sale
or other disposition of (I) real property held less than four years, other than
foreclosure property or property involuntarily or compulsorily converted within
the meaning of Code Section 1033, (ii) stock or securities held less than one
year, and (iii) property sold in a prohibited transaction.
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PROHIBITED TRANSACTIONS. A "prohibited transaction" is one involving a
sale of dealer property, other than foreclosure property. See "GLOSSARY." The
Code provides a safe harbor whereby the sale of a property is not a prohibited
transaction if: (I) AmREIT held the property for not less than four years; (ii)
AmREIT made no more than seven property sales (other than "foreclosure
property") during such taxable year, or the adjusted basis of all such sales is
not more than 10% of the adjusted basis of all of AmREIT's assets as of the
beginning of such year; (iii) the aggregate expenditures made by AmREIT (or any
partner or joint venture of AmREIT) during the four-year period preceding the
date of the sale which are includable in the basis of the property do not
exceed 30% of the net selling price of such property; and (iv) in the case of
land or improvements not acquired through foreclosure or lease termination,
AmREIT held the property for at least four years for the production of rental
income. Losses from prohibited transactions may not be taken into account in
determining the amount of net income from prohibited transactions. However,
any net loss from prohibited transactions may be taken into account in
computing REIT taxable income.
In the event the IRS were successful in characterizing AmREIT as a dealer
in connection with any sale of a property, AmREIT could be subject to the 100%
Excise Tax. In addition, capital gain treatment and any otherwise applicable
capital gain tax rate with respect to the sale of the property could be
unavailable. Under such circumstances, AmREIT could be unable to satisfy the
75% and 95% source of income tests. Likewise, there is no assurance that
improvements made by AmREIT to any property will not exceed 30% of the net
selling price of such properties (as stated previously, this test is no longer
applicable) or that AmREIT will not make more than seven sales of properties in
any one year.
AmREIT does not intend to hold any property primarily for sale to
customers in the ordinary course of its trade or business ("dealer property").
However, the determination of whether properties are held by AmREIT as "dealer
property" depends on the facts and circumstances relating to the particular
property at the time of sale. Also, the Company's purposes for holding
property may change during the course of its investments. Accordingly, there
can be no assurance that AmREIT will avoid "dealer status" with respect to each
of its properties.
ADDITIONAL REQUIREMENTS. In addition to the foregoing, AmREIT must:
o Except for the application of Code Section 856-860, be
taxable as a "domestic corporation";
o Use the calendar year as its annual accounting period for
federal income tax purposes; and
o Conduct is affairs, with certain limitations, and manage and
dispose of its properties under the continuing exclusive
authority and management of its Directors.
DISTRIBUTION REQUIREMENTS
DISTRIBUTIONS DURING THE TAXABLE YEAR. In addition to satisfying the
requirements discussed above, in order to qualify for taxation as a REIT,
AmREIT must distribute to the Shareholders in each taxable year an amount at
least equal to the sum of:
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o 95% of its REIT Taxable Income (as defined below), before
the deduction for dividends paid and excluding any net
capital gain; and
o 95% of the net income from foreclosure property minus the
tax imposed on that income; minus
o Excess non-cash income.
"REIT Taxable Income" is defined under Code and Regulations as AmREIT's
taxable income computed as if AmREIT were an ordinary corporation with certain
adjustments. See "GLOSSARY" for a detailed definition of REIT Taxable Income.
In some situations, AmREIT may produce taxable income in excess of the
cash available for distribution by AmREIT. As a result, from time to time,
AmREIT might have to attempt to borrow, use cash reserves or sell properties to
meet the 95% distribution test.
DISTRIBUTIONS AFTER THE TAXABLE YEAR. Under certain circumstances,
AmREIT can rectify its failure to meet the 95% distribution test by paying
dividends after the close of the taxable year.
Dividends Paid in the Following Year. For purposes of the 95%
distribution test, AmREIT is permitted to treat as distributed in a particular
taxable year, certain dividends that it pays to the Shareholders in the
following taxable year. To qualify for this treatment, the dividends must be
declared before the date on which AmREIT's tax return filings are due
(including extension periods), and the dividend must be paid within twelve
months of the end of the taxable year and no later than the next regular
dividend payment after the declaration.
Deficiency Dividends. Although AmREIT may meet the 95%
distribution test based upon the figures reflected in its tax returns, the IRS
might successfully dispute those figures. If an adjustment is made that causes
the dividends paid by AmREIT to be insufficient to have met the 95%
distribution test, it may pay a deficiency dividend that will be permitted as a
deduction in the taxable year to which the adjustment is made, so that AmREIT
will retroactively be deemed in compliance with the 95% distribution test. To
qualify as a deficiency dividend, AmREIT must make this dividend within a
specified period. No deficiency dividend deduction is allowed if the
deficiency is due and there exists fraud with intent to evade tax or willful
failure to file a timely tax return.
TERMINATION OR REVOCATION OF REIT STATUS
The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet one of the various requirements described
above. AmREIT may voluntarily revoke its election within the first 90 days of
any taxable year after the first taxable year for which such election is
effective in the manner prescribed in the Treasury Regulations. If a
termination or revocation occurs, AmREIT (and its successor) will not be
eligible to elect REIT status for any taxable year prior to the fifth taxable
year that begins after the taxable year for which the termination or revocation
is first effective. However, this five-year ineligibility rule will not apply
in the case of terminations by failure to satisfy the qualification
requirements if: (I) AmREIT does not willfully fail to timely file an income
tax return for the taxable year of the termination, (ii) any incorrect
information in such return is not due to fraud with intent to evade tax, and
(iii) AmREIT's failure to qualify as a REIT is due to reasonable cause and not
due to willful neglect.
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TAXATION OF AMREIT
IF QUALIFIED REIT. The following discussion generally describes the
various tax rules applicable to AmREIT for years in which it qualifies as a
REIT.
Loss Carry Forward. AmREIT generally cannot carry its net
operating or net capital losses back to prior years, but it may carry forward
net operating loss for 15 years and net capital loss for 5 years.
Income Taxable if Not Distributed. AmREIT is taxed on its REIT
taxable income which is not timely distributed to the Shareholders and on its
undistributed capital gain, as if it were an ordinary domestic corporation. As
explained above, this income is essentially AmREIT's undistributed net income
and, in certain circumstances, dividends paid after the end of each taxable
year may also be deducted in determining the income subject to tax. However,
to discourage a REIT from delaying distributions until the year after the
income earned, the Code imposes a nondeductible excise tax on undistributed
income of 4% of the amount by which the required distribution exceeds the
amount distributed in the taxable year. The required distribution is the sum
of 85% of AmREIT's ordinary income, plus 95% of its capital gain net income,
plus the excess, if any, of the "grossed up required distribution" for the
preceding calendar year over the distributed amount for such year. The
"grossed up required distribution" for the proceeding calendar year is the sum
of AmREIT's taxable income for that year (without regard to deductions for REIT
distributions) and amounts from earlier years that are not treated as having
been distributed.
If AmREIT has undistributed net capital gain for a taxable year,
it must pay tax on such amounts. Currently, corporate long-term capital gains
are taxed as ordinary income, but will be subject to a maximum rate of 35%.
The alterative tax rate for corporate net capital gains does not apply.
Income Taxable Whether or Not Distributed. The following forms of
income are subject to taxation at the corporate level, whether or not they are
distributed to the Shareholders:
o Income Violating the 75% or 95% Source of Income Tests. If
AmREIT fails to meet either the 75% or 95% source of income
tests described above, but still qualifies for taxation as a
REIT under the reasonable cause exception to those tests, a
100% tax is imposed on an amount equal to the result
obtained by multiplying (I) the greater of (A) the amount by
which AmREIT failed to meet the 75% test or (B) the amount
by which it failed to meet the 95% test, by (ii) a fraction,
the numerator of which is the Company's taxable income (with
certain adjustments) and the denominator of which is the
Company's gross income (with certain adjustments).
o Net Income From Foreclosure Property. The Company's net
income from foreclosure property would be taxed at the
highest corporate rate, which is presently 35%.
o Income From Prohibited Transactions. The Company's net
income from prohibited transactions will be taxed at a rate
of 100% whether or not such income is distributed to the
Shareholders.
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o Minimum Tax on Items of Tax Preference. AmREIT may be
subject to the corporate Alternative Minimum Tax ("AMT"),
which is similar to the individual AMT. The corporate AMT
rate is 20% with a $40,000 exemption amount (phased out at
the rate of $.25 on each dollar for AMT income in excess of
$150,000) on items of tax preference allocable to it.
Like Kind Distributions. AmREIT's Bylaws do not permit it to make
any in-kind distributions to the Shareholders.
Qualified REIT Subsidiaries. A REIT owning a "qualified REIT
subsidiary" may treat all of the assets, liabilities and items of income,
deduction, and credit of the subsidiary as though they were those of the REIT.
To be a qualified REIT subsidiary, 100% of the subsidiary must be owned by the
REIT.
IF NOT QUALIFIED AS A REIT. For any taxable year in which AmREIT fails
to qualify as a REIT, it will be taxed at a maximum corporate rate (currently
35%) on its taxable income, whether or not the income is distributed to the
Shareholders. In any taxable year for which AmREIT qualifies as a REIT, it
will be taxed as an ordinary corporation only on its undistributed income,
except that certain types of income will be taxable at the corporate level
whether or not they are distributed to the Shareholders.
TAXATION OF DOMESTIC SHAREHOLDERS
For any taxable year in which AmREIT fails to qualify as a REIT,
distributions to the Shareholders would be taxed as ordinary dividends to the
extent of AmREIT's current and accumulated earnings and profits. Such
dividends would be eligible for the dividend exclusion for individuals or the
70% dividends received deduction for corporations.
TAXATION OF DISTRIBUTIONS. For any taxable year in which AmREIT
qualifies as a REIT, the amounts it distributes to the Shareholders will be
taxed as follows:
Distributions From Current and Accumulated Earnings and Profits.
Distributions from AmREIT will be taxable to Shareholders who are not
tax-exempt entities as ordinary income to the extent of the earnings and
profits of AmREIT. Any dividend declared by AmREIT in October, November, or
December of any year payable to Shareholders of record on a specified date in
such a month shall be deemed to have been received by each Shareholder on
December 31st of such year and to have been paid by AmREIT on December 31st of
such year, provided such divided actually is paid by January 31st of the
following year. Consequently, any such dividend will be taxable to a
Shareholder in such Shareholder's taxable year including December 31st. (It is
possible that any portion of a dividend made to a Shareholder after December
31st not from current or accumulated earnings and profits would be treated as a
distribution by AmREIT in the year it is actually made. Accordingly, if AmREIT
has sufficient earnings and profits in the year in which such dividend actually
is paid, no portion of such dividend would be a return of capital
distribution.) Dividends paid to such Shareholders will not constitute passive
activity income (such income, therefor, will not be subject to reduction by
losses from passive activities of a Shareholder who is subject to the passive
activity loss rules). Such distributions, however, will be considered
investment income, which may be offset by investment deductions.
Capital Gain Distributions. Dividends that are designated as
capital gains dividends by AmREIT will be taxed as long-term capital gain to
taxable Shareholders to the extent that they do not
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exceed AmREIT's actual net capital gain for the taxable year. A Shareholder
that is a corporation may be required to treat up to 20% of any such capital
gains dividend as ordinary income. Such distributions, whether characterized
as ordinary income or as capital gains, are not eligible for the 70% dividends
received deduction for corporations. Shareholders are not permitted to deduct
any net losses of AmREIT. The maximum federal income tax rate applicable to
net capital gains (the excess of net long-term capital gains over net
short-term capital losses) recognized by an individual is 20% as compared to a
maximum rate of 39.6% for ordinary income. To the extent that AmREIT
designates a portion of a dividend as an "unrecaptured Section 1250 gain
distribution" such amount will be subject to a maximum tax rate of 25%.
The 1997 Act also permits AmREIT, for its taxable year beginning
January 1, 1998, to elect to retain, rather than distribute, its net long-term
capital gains and pay the tax on such gains. Correspondingly, its Shareholders
would include their proportionate share of the undistributed long-term capital
gains in income and receive a credit for their share of the tax paid by AmREIT.
Return of Capital. To the extent any distributions made by AmREIT
to the Shareholders exceed the current and accumulated earnings and profits of
AmREIT, such distributions will constitute a non-taxable return of capital to
the Shareholder to the extent of the Shareholder's adjusted tax basis in his or
her Shares. A Shareholder's adjusted tax basis in his or her Shares will be
reduced (but not below zero) by the amount of such excess. The proportion of
the distributions that exceed such adjusted tax basis will be taxable to the
Shareholder as gain from the sale or exchange of his or her Shares.
NOTIFICATION. AmREIT will promptly, as required, notify Shareholders of
the amount of any items of tax preference and the portion of distributions made
during each taxable year that constitute return of invested capital.
BACKUP WITHHOLDING. AmREIT will be required to withhold tax from
dividends paid to a Shareholder under certain circumstances as specified in the
"backup" withholding provisions. These provisions only apply to a Shareholder
who (I) fails to furnish his or her taxpayer identification number ("TIN") to
AmREIT as required; (ii) who has, according to the IRS, furnished an incorrect
TIN to AmREIT; (iii) who has, according to the IRS, under-reported interest,
dividends or patronage dividend income in the past; or (iv) who has failed to
satisfy the payee's certification requirements of Code Section 3406. With
respect to such a Shareholder, AmREIT will impose backup withholding on
dividends paid by AmREIT at the required rate of 31%. Foreign investors are
subject to different withholding rules.
ALTERNATIVE MINIMUM TAX. Individual and other non-corporate Shareholders
may, as a result of their investment in AmREIT, be subject to AMT, but only to
the extent it exceeds their regular tax liability. Effective beginning in
1993, a two-tiered, graduated rate schedule for AMT is applicable. The lower
tier consists of a 26% rate, applicable to the first $175,000 of a taxpayer's
alternative minimum taxable income (AMTI) in excess of the exemption amount.
The upper tier consists of a 28% rate, applicable to AMTI that is greater than
$175,000 above the exemption amount. For married individuals filing
separately, the 28% rate applies to AMTI that is greater than $87,500 above the
exemption amount. The exemption amounts are $45,000 for married individuals
filing joint returns, $33,750 for unmarried individuals, and $22,500 for
married individuals filing separately, estates and trusts.
AMTI is calculated by adding the taxpayer's items of tax preference to
his or her adjusted gross income (computed without regard to any deduction for
net operating loss carry-overs) and subtracting certain itemized deductions (to
the extent they do not create a net operating loss, which can be carried to
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another year for purposes of the regular tax), the taxpayer's AMT on net
operating loss carry-overs and the applicable exemption amount. Under the 1986
Act, REITs are subject to AMT to the extent items of tax preference and other
items are treated differently for regular tax and AMT purposes. Code Section
59(d) authorizes the IRS to issue regulations concerning the apportionment of
differently treated items between a REIT and its shareholders. These
regulations, when issued, could result in shareholders being allocated such
differently treated item for inclusion in their own tax returns.
STATEMENT OF SHARE OWNERSHIP. Each year AmREIT must demand from the
record holders of designated percentages of its Shares written statements
disclosing the actual owners of the Shares. AmREIT must also maintain permanent
records showing the information it has received from the shareholders on this
subject, and a list of those persons failing or refusing to comply with its
request for that information. The 1997 Act requires a REIT which fails to
comply with the regulatory rules on determining its ownership for a tax year to
pay a $25,000 penalty upon receiving notice and demand from the IRS.
TAXATION OF TAX-EXEMPT ENTITIES. In general, a shareholder that is a
tax-exempt entity not subject to tax on its investment income will not be
subject to tax on distributions from AmREIT. The IRS has ruled that regardless
of whether AmREIT incurs indebtedness in connection with the acquisition of
properties, distributions paid by AmREIT to a shareholder that is a tax-exempt
entity will not be treated as UBTI, provided that (I) the tax-exempt entity has
not financed the acquisition of its Shares with "acquisition indebtedness"
within the meaning of the Code and the Shares otherwise are not used in an
unrelated trade or business of the tax exempt entity and (ii) AmREIT is not a
pension-held REIT. This opinion applies to a shareholder that is an
organization that qualifies under Code Section 401(a), an IRA or any other
tax-exempt organization that would compute UBTI, if any, in accordance with
Code Section 512(a)(1). However, pursuant to changes that are part of the 1993
Tax Act, if AmREIT is a pension-held REIT and a tax-exempt shareholder owns
more than 10 percent of AmREIT, such shareholder will be required to recognize
as UBTI that percentage of the dividends that it receives from AmREIT as is
equal to the percentage of AmREIT's gross income that would be UBTI to AmREIT
if AmREIT were a tax-exempt entity required to recognize UBTI. A REIT is a
pension-held REIT if at least one qualified trust holds more than 25 percent of
the value of the REIT's shares or one or more qualified trusts, each of whom
own more than 10 percent of the REIT's shares, hold more than 50 percent of the
value of the REIT's shares.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20), respectively, income from an investment in AmREIT will constitute UBTI
unless the organization is able to deduct amounts set aside or placed in
reserve for certain purposes so as to offset the UBTI generated by its
investment in AmREIT. Such prospective shareholders should consult their own
tax advisors concerning these "set aside" and reserve requirements.
FOREIGN SHAREHOLDERS
Nonresident alien individuals, foreign corporations, foreign partnerships
and other foreign Shareholders are subject to United States federal income tax
under rules which are complex and the application of which will vary depending
on the individual foreign Shareholder's circumstances. Accordingly, no attempt
is made to summarize these rules and prospective foreign Shareholders should
consult their own tax advisors concerning those provisions of the Code which
deal with the taxation of foreign taxpayers.
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DIVIDEND REINVESTMENT PLAN
Shareholders who elect to participate in AmREIT's Dividend Reinvestment
Plan will be deemed to have received the gross amount of dividends distributed
on their behalf to the Plan's Trustee or agent as agent for the participants in
the Plan. Such deemed dividends will be treated as actual dividends to such
shareholders by AmREIT and will retain their character and have the tax effects
described above. Participants that are subject to federal income tax will thus
be taxed as if they received such dividends despite the fact that their
distributions have been reinvested and, as a result, they will not receive any
cash with which to pay the resulting tax liability. The IRS has ruled that a
maximum 5% discount (i.e., dividends reinvested in newly issued Shares at a
price equal to 95% of the Shares' fair market value on the distribution date)
representing the underwriting and other costs that AmREIT otherwise would
expect to incur to issue new stock is permitted without causing AmREIT to lose
its dividends paid deduction. The IRS might assert that Shares issued for a
fixed price under the Dividend Reinvestment Plan would violate the 5% discount
cap if AmREIT's assets have appreciated. However, based on the availability of
updated appraisals, AmREIT will adjust the Plan's Share purchase price to take
into account asset value changes between distribution dates to strive to
preserve its dividends paid deduction. Shares received pursuant to the
Dividend Reinvestment Plan will have a holding period which begins on the day
after purchase by the Plan's Trustee or agent. The tax basis of the Shares
acquired through the Dividend Reinvestment Plan will generally be the gross
amount of the deemed dividends invested in such Shares. UNITED STATES REPORT
REQUIREMENTS
Subject to regulations, the IRS may impose annual reporting requirements
of certain United State and foreign persons directly holding United States Real
Property Interests ("USRPIs"). The required reports are in addition to any
necessary income tax returns. Furthermore, because Shares in a domestically
controlled REIT do not constitute USRPIs, such reporting requirements will not
apply to a foreign Shareholder in AmREIT (assuming that AmREIT will be
domestically controlled) if such Shareholder does not otherwise own USRPIs.
However, AmREIT is required to file an information return with the IRS setting
forth the name, address and taxpayer identification number of the payee of
dividends from AmREIT, whether the payee is a nominee or is the actual
beneficial owner of the Shares.
STATE AND LOCAL TAXES
Treatment of AmREIT and the Shareholders under state and local tax laws
may differ substantially from the federal income tax treatment described above.
CONSEQUENTLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR WITH REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
AMREIT.
AMREIT AND ITS BUSINESS
DESCRIPTION OF AMREIT
AmREIT was organized on August 17, 1993, as a Maryland business
corporation and operates as a real estate investment trust ("REIT") under the
federal income tax laws. AmREIT acquires, owns and manages a diversified
portfolio of quality, frontage retail properties leased to national and
regional retail tenants. Each of AmREIT's properties is initially leased under
a full-credit, long-term net lease, under which the tenant is responsible for
the operation costs of the property, including taxes, insurance and maintenance
costs. As of the date of this Prospectus, AmREIT owned a total of 14
properties and has
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contracted to acquire one additional property in development. The term
"development" means that acquisition of the underlying land is contracted for,
the property is under lease, subject to timely completion, and construction is
anticipated to commence within six months. The aggregate purchase prices of
these 15 properties are approximately $22,985,000 and total annualized rents
are approximately $2,458,000, with an annual capitalization rate of
approximately 10.7% based on purchase price. These 15 properties are leased to
a total of 8 different tenants and are located in 7 states. AmREIT's properties
contain an aggregate of approximately 193,920 square feet of gross leasable
area. AmREIT's principal executive offices are located at Eight Greenway Plaza,
Suite 824, Houston, Texas 77046, and its telephone number is (713) 850-1400.
The property under development is being developed by AmREIT through a
joint venture with an unrelated party. AmREIT intends to continue its focus on
acquiring frontage retail properties and may acquire one or more
multi-structure properties leased to two or more unrelated tenants.
Formerly, substantially all aspects of AmREIT's business and affairs were
administered, under the direction of AmREIT's Board of Directors, by the
Adviser, American Assets Advisers Realty Corporation. The Adviser provided
administrative, acquisition, development, management and operational services
to AmREIT pursuant to an Omnibus Services Agreement. The terms and conditions
of the Omnibus Services Agreement are described under "The Adviser" below.
AmREIT had only one part-time employee, Mr. H. Kerr Taylor, AmREIT's Chairman
and Chief Executive Officer. Mr. Taylor also served in similar capacities to
the Adviser and each of its affiliates. Mr. Taylor was the sole shareholder,
the principal officer and a director of the Adviser. AmREIT's objective is to
be an efficient and competitive real estate operating company focusing on a
diversified portfolio of frontage retail properties located throughout the
United States.
AMREIT'S INVESTMENT OBJECTIVES
AmREIT's principal investment objectives are:
o To provide regular dividends to Shareholders.
o To provide dividends that are partially free from current
taxation. So long as AmREIT qualifies as a REIT, it will generally
not be taxed on taxable income to the extent it pays dividends to
the Shareholders.
o To provide Shareholders with long-term appreciation on their
investment.
o To provide investors with an inflation hedge.
o To conserve Shareholders' capital through a diversified portfolio
of quality real estate.
There can be no assurance that any or all of the foregoing objectives
will be achieved as each, to some extent, is dependent upon factors and
conditions which are beyond the control of AmREIT.
AmREIT may commit to purchase properties prior to, during or upon their
physical completion at agreed prices or pursuant to pricing formulas. To the
extent possible, AmREIT intends to diversify the type and location of its
properties.
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AMREIT'S STATED INVESTMENT POLICIES
AmREIT's Stated Investment Policies are investment policies and
restrictions set forth in its Bylaws pursuant to which AmREIT must conduct its
affairs. The Board may not make any material change in a Stated Investment
Policy without first obtaining the approval of Shareholders owning a majority
of the then outstanding Shares. Set forth below is a summary of AmREIT's
Stated Investment Policies.
INVESTMENTS IN PROPERTIES. AmREIT must:
(1) invest only in interests (including mortgage loan
interests secured by) income-producing, undeveloped, development stage and
improved real estate Properties using borrowed capital only where prudent as
determined by the Board;
(2) invest only in properties subject to leases with
lessees who have demonstrated (or together with a guarantor has demonstrated)
to management the financial capability to perform under their lease;
(3) not invest more than 10% of its total assets in
unimproved real property or mortgage loans on unimproved real property;
(4) not engage in the purchase and sale of investments,
other than real property interests which satisfy AmREIT's investment objectives
or for the purpose of investing on a short-term basis reserves and funds
available for the purchase of properties; and
(5) pay consideration for a property which is based on
its fair market value as determined by the Independent Directors. In cases
where the majority of the Independent Directors determine, and in all
acquisitions from Interested Persons, as defined below, such fair market value
shall be determined by an independent expert selected by the Independent
Directors.
POLICY RESTRICTIONS. AmREIT may not engage in any of the following
financial or investment activities.
Loan Investments: AmREIT may not:
(1) invest more than ten percent (10%) of its total
assets in second mortgages, excluding wrap- around type second mortgage loans;
(2) make or invest in mortgage loans, including
construction loans, on any one property if the aggregate amount of all mortgage
loans outstanding on the property, including AmREIT's loan(s), would exceed an
amount equal to eighty-five percent (85%) of the appraised value of the
property as determined by appraisal unless substantial justification exists
because of the presence of other underwriting criteria. For purposes of this
subsection, the "aggregate amount of all mortgage loans outstanding on the
property, including the loans of the Company," shall include all interest
(excluding contingent participation in income and/or appreciation in value of
the mortgaged property), the current payment of which may be deferred pursuant
to the terms of such loans, to the extent that deferred interest on each loan
exceeds five percent (5%) per annum of the principal balance of the loan;
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(3) make or invest in any mortgage loans that are
subordinate to any mortgage or equity interest of an Advisor, Directors or any
affiliate of the Company; or
(4) invest in any mortgage loans that are subordinate to
any liens or other indebtedness on a property if the effect of such mortgage
loans would be to cause the aggregate value of all such subordinated
indebtedness to exceed twenty-five percent (25%) of the Company's tangible
assets.
Restrictions on Leverage. AmREIT may not borrow funds in order to
distribute the proceeds to the Shareholders and thereby offset
under-performance by the properties, unless it is required to do so for REIT
qualification purposes.
The Directors must review AmREIT's borrowings at least quarterly
for reasonableness in relation to its Net Assets. AmREIT may not incur
indebtedness if, after giving effect to the incurrence thereof, aggregate
indebtedness, secured and unsecured, would exceed three hundred percent (300%)
of its net assets on a consolidated basis. For this purpose, the term "Net
Assets" means AmREIT's total assets (less intangibles) at cost, before
deducting depreciation or other non-cash reserves, less total liabilities, as
calculated at the end of each quarter on a basis consistently applied.
Investment Limitations. AmREIT may not:
(1) invest in equity securities of other issuers unless a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction approve the transaction as being
fair, competitive and commercially reasonable;
(2) invest in the equity securities of any
non-governmental issue, including other real estate investment trusts or
limited partnerships for a period in excess of eighteen (18) months, unless
approved by a majority of the Directors, including a majority of the
Independent Directors;
(3) engage in underwriting or the agency distribution of
securities issued by others;
(4) invest in commodities or commodity futures contracts,
other than solely for hedging purposes;
(5) engage in short sales of securities or trading, as
distinguished from investment activities; or
(6) invest in real estate contracts of sale, otherwise
known as land sale contracts, unless such contracts are in recordable form and
appropriately recorded in the chain of title.
AmREIT Securities. AmREIT may not issue:
(I) equity securities which are redeemable at the
election of the holder of such securities;
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(ii) debt securities unless the historical debt
service coverage (in the most recently
completed fiscal year) as adjusted for known
changes is sufficient to properly service that
higher level of debt;
(iii) warrants, options or similar evidences of a
right to buy its securities, unless (I) issued
to all of its security holders ratably, (ii) as
part of a financing arrangement, or (iii) as
part of a stock option plan to directors,
officers or employees of the Company (together
referred to herein as "Interested Persons")
which meets the conditions of Section
260.140.41, Title 10, California Code of
Regulations; or
(iv) shares on a deferred payment basis or other
similar arrangement.
TRANSACTIONS WITH ADVISER, SPONSOR, DIRECTOR OR THEIR AFFILIATES. The
Bylaws restrict dealings between AmREIT and its officers, directors, sponsors
and any Adviser. AmREIT's sponsors are Mr. Taylor and his Affiliates. In the
Bylaws, an Adviser is defined as "the Person responsible for directing or
performing the day-to-day business affairs of AmREIT, including a Person to
which an Adviser subcontracts substantially all such functions. AmREIT is
self-managed and does not have an external Adviser. The following restrictions
apply to sponsors, Advisers, directors and/or interested persons and their
respective Affiliates ("Interested Persons").
Sales To Interested Persons. An Adviser, Officer or Director may
not acquire assets from AmREIT except as approved by a majority of Directors
(including a majority of Independent Directors), not otherwise interested in
such transaction, as being fair and reasonable to AmREIT.
Acquisitions From Interested Persons. Any transaction with a
Director, officer or Affiliate that involves the acquisition of a property from
an Interested Person must be approved by a majority of the Independent
Directors as being fair and reasonable to AmREIT and at a price not greater
than the cost of the property to such seller, or if at a greater price only if
substantial justification exists and such excess is reasonable and not in
excess of the properties' current appraised value.
Leases to Interested Persons. AmREIT may lease assets to an
Advisor, or a Director only if such transaction is approved by a majority of
Directors (including a majority of Independent Directors), not otherwise
interested in such transaction, as being fair and reasonable to AmREIT.
Loans From Interested Persons. AmREIT may not borrow money from an
Adviser or a Director unless a majority of the Directors, including a majority
of the Independent Directors, not otherwise interested in such transaction
approve the transaction as being fair, competitive, and commercially reasonable
and no less favorable to the Company than loans between unaffiliated parties
under the same circumstances.
Loans To Interested Persons. AmREIT may not make or invest in
loans to a Sponsor, Adviser or Director, which includes any Affiliate thereof,
except for mortgage loans for the construction of improvements on Properties to
be acquired by AmREIT that are under lease or binding contract to be leased to
qualifying tenants and those loans insured or guaranteed by a government or
government agency or unless an appraisal is obtained on the underlying
property. An appraisal of the underlying property shall be obtained in
connection with any loan to an Adviser, Director or their Affiliate;
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Other Transactions With Interested Persons. All other
transactions between AmREIT and the Sponsor, Advisor, or a Director shall
require approval by a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in such transactions as being
fair and reasonable to AmREIT and on terms and conditions not less favorable to
AmREIT than those available from unaffiliated third parties.
JOINT VENTURE INVESTMENTS. AmREIT may enter into joint ventures with
unaffiliated third parties. AmREIT may also invest jointly with another
publicly-registered entity sponsored by a Sponsor, Advisor or Director that has
investment objectives and management compensation provisions substantially
identical to those of AmREIT, provided that the following conditions must be
satisfied.
(1) the joint venture must have investment objectives
comparable to AmREIT;
(2) the investment by each party to the joint venture
must be on substantially the same terms and conditions; provided, however,
AmREIT shall own more than fifty percent (50%) of any joint venture between it
and its sponsor or Affiliate;
(3) in making any such joint venture investment, AmREIT
may not pay more than once, directly or indirectly, for the same services and
may not act indirectly through any such joint venture if AmREIT would be
prohibited from doing so directly because of restrictions contained in the
Bylaws; and
(4) in the event of a proposed sale of the Property
initiated by the other joint venture partner, AmREIT must have a right of first
refusal to purchase the other party's interest.
OPERATING EXPENSES. Under AmREIT's Bylaws, its Total Operating Expenses,
including, but not limited to certain administration items such as personnel
salaries and the salary of Taylor, are (in the absence of a satisfactory
showing to the contrary) deemed excessive if they exceed in any fiscal year the
greater of 2.0% of its Average Invested Assets or 25% of its net income for
such year. The Independent Directors have the responsibility of limiting such
expenses to amounts that do not exceed such limitations unless they determine
that, based on such unusual and non-recurring factors which they deem
sufficient, a higher level of expenses is justified for such year. Any such
finding and the reasons in support thereof shall be reflected in the minutes of
the meeting of the Board of Directors.
REAL ESTATE COMMISSIONS ON RESALE OF PROPERTY. If an Advisor, Officer or
Director provides a substantial amount of the services in the effort to sell
an AmREIT property, that such Person may receive up to one-half of the
brokerage commission paid but in no event to exceed an amount equal to 3% of
the Contract Price for the Property. In addition, the amount paid when added
to the sums paid to unaffiliated parties in such a capacity shall not exceed
the lesser of the Competitive Real Estate Commission or an amount equal to 6%
of the Contract Price for the Property. The "Competitive Real Estate
Commission" is the real estate or brokerage commission paid for the purchase or
sale of a property which is reasonable, customary and competitive in light of
the size, type and location of such property. The "Contract Price" is the
amount actually paid or allocated to the purchase, development, or construction
or improvement of a property exclusive of the Acquisition Fees and Acquisition
Expenses.
ACQUISITION FEES AND ACQUISITION EXPENSES. AmREIT may not pay Acquisition
Fees and Acquisition Expenses which are unreasonable. The total amount of such
fees may not exceed 6% of the Contract Price
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of the Property, or in the case of a mortgage loan, 6% of the funds advanced.
Notwithstanding the foregoing, a majority of the Directors, including a
majority of the Independent Directors, not otherwise interested in the
transaction may approve fees in excess of these limits if they determine the
transaction to be commercially competitive, fair and reasonable to AmREIT.
AMREIT'S OPERATING STRATEGY
AmREIT's policies with respect to the following activities have been
determined by the Board within the restrictions of AmREIT's Stated Investment
Policies and, in general, may be amended or revised, from time to time, subject
to the stated objections and policies, by the Board without a vote of the
shareholders. See "RISK FACTORS -- Changes in Policies."
GROWTH STRATEGY. AmREIT intends to pursue a growth strategy which will
maximize the total return to its shareholders. AmREIT intends to continue to
focus on the frontage retail sector of the real estate market, believing that
this sector is capable of providing appealing returns at more attractive risk
levels than other sectors of the retail/commercial real estate market. AmREIT's
growth strategy will focus on major markets in the Southwest region of the
United States, with the goal of achieving a significant presence in major
retail corridor markets of targeted cities. In pursuing its growth strategy,
AmREIT intends to utilize research-driven investment analysis, disciplined
buy/sell decisions and state-of-the-art operating systems.
AmREIT presently intends to raise public and private equity capital and
institutional and investor debt capital to fund its growth strategy through
unsecured credit facilities, traditional mortgage debt transactions, and
private equity placements and/or public securities offerings.
INVESTMENT STRATEGY. AmREIT will continue to invest in existing,
newly-developed, development stage or undeveloped retail properties subject to
leases under which the tenant is responsible for all operating costs (i.e., the
tenant pays non-capital costs associated with operating the leased premises),
frequently referred to as a net lease. AmREIT will continue to seek to lease
its properties to single tenants, but may acquire multiple tenant properties.
AmREIT intends to continue to concentrate its investments in the southwest
United States, but may invest in properties anywhere in the continental United
States.
In determining whether a property is a suitable for investment,
management considers the following factors, among others:
(a) the safety of the investment;
(b) the location, condition, use and design of the property and
its suitability for a long-term net lease or a lease that
otherwise limits the amount of expenses to be incurred by
AmREIT;
the cashflow expected to be generated by the property;
(d) the terms of the proposed lease (including, specifically,
provisions relating to rent increases or percentage rent and
provisions relating to passing on operating expenses to
tenants);
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(e) the creditworthiness of the lessee (based on the lessee's
most recent audited financial statement or other similar
evidence establishing net worth) and the cash flow expected
to be generated by the property;
(f) the prospects for long-term appreciation of the property;
(g) the prospects for long-range liquidity of the investment; and
(h) the stability and potential growth of the community.
AmREIT invests in properties which are either under current lease or are
to be leased upon completion of development to a national or regional
corporation. However, in circumstances deemed appropriate, leases may be with
a sole proprietor or franchisee operating the businesses on the property.
AmREIT has no minimum financial requirements for its tenants, which will vary
depending on individual circumstances of the property and the lease. With
respect to the credit of a prospective tenant, AmREIT will evaluate the party's
creditworthiness in terms of its most recent audited financial statements, its
general credit history, any trends exhibited by its credit rating, appropriate
references, if available, the type of business in which it engages, the size
and scope of its business, the length of its operating history, the background
and experience of its management and similar types of factors.
Management also considers a property's prospects for long-term
appreciation and the prospects for long-range liquidity of the investment.
Other considerations of AmREIT affecting appreciation of the properties and
liquidity of the investment include: inclusion of lease clauses providing for
increased rents based on a tenant's increased revenues, lease clauses providing
for periodic inflation adjustments to the base rent, minimizing deferred
maintenance by prompt attention to repair and replacement needs at the
properties and by including common area maintenance clauses in the leases.
AmREIT's procedures with respect to environmental due diligence are to
require, prior to the purchase of a property, that all conditions imposed by a
lender loaning funds towards the acquisition of the property, if applicable,
have been satisfied and that all conditions imposed by the title insurer which
exclude coverage due to environmental conditions are either removed, waived or
found acceptable by a majority of AmREIT's Directors. Where neither lender nor
title insurer conditions raise issues regarding environmental due diligence,
AmREIT may nevertheless require certain protective representations from the
seller of a property, including a satisfactory level one environmental study of
the property site.
AmREIT competes for both investment opportunities and the operation of
its properties with other real estate investors (both domestic and foreign),
including other real estate investment trusts and limited partnerships which
have investment objectives similar to those of AmREIT and which are likely to
have resources greater than those of AmREIT. Management continually monitors
the real estate market in order to identify potential desirable property
acquisitions and advantageous disposition opportunities for its properties.
AmREIT plans to explore possible acquisitions of properties in whole or
partial exchange for its equity securities. AmREIT has authority to issue
additional Shares or other securities in exchange for property and other valid
consideration, and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. AmREIT has
authorized Preferred Stock, but has not issued such senior securities.
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MANAGEMENT OF PROPERTIES. AmREIT internally manages each of its
properties. Such management includes providing leasing services in connection
with identifying and qualifying prospective tenants, assisting in the
negotiation of the leases, providing statements as to the income and expense
applicable to each property, receiving and depositing monthly lease payments,
periodic verification of tenant payment of real estate taxes and insurance
coverage, and periodic inspection of properties and tenants' sales records
where applicable. AmREIT pays no property management fees or advisory fees.
The tenants will be responsible, at their expense, for day-to-day oversight and
maintenance of the properties.
In general, AmREIT's purchase price of each property is supported by an
Independent Appraisal of the fair market value of the property. The Directors
will rely on their own analyses and not solely on appraisals in determining
whether to acquire a particular property, as appraisals cannot be relied upon
exclusively as measures of true worth or realizable value. Copies of such
appraisals are retained by AmREIT at its offices for at least five years and
are available for inspection.
AmREIT acquires marketable title to each of its properties, subject only
to such liens and encumbrances as are acceptable to management. Evidence of
title includes a policy of title insurance, an opinion of counsel or such other
evidence as is customary in the locality in which the property is situated.
DEVELOPMENT OF PROPERTIES. AmREIT intends to continue to increase its own
development of properties. Under AmREIT's Bylaws not more than 10% of the
total assets of AmREIT may be invested in unimproved real property and AmREIT
does not intend to seek shareholder approval to exceed such percentage.
Depending upon the circumstances, improvements will be developed and/or
constructed either through joint ventures with third party development
companies from whom AmREIT purchases the Properties, by the tenants to whom
such properties are leased, or by development companies other than the sellers
of the Properties. AmREIT finances the construction or completion of
improvements on particular Properties through borrowing under its current
credit facilities, which it intends to increase should the Merger be
consummated.
To the extent AmREIT acquires Property on which improvements are to be
constructed or completed, AmREIT is subject to risk in connection with the
builder's ability to control construction costs or to build in conformity with
plans, specifications and timetables and to make the Property available to the
lessee within the time projected. Performance may be affected or delayed by
conditions beyond the builder's control such as building restrictions,
clearances and environmental impact studies imposed or caused by governmental
bodies, labor strikes, adverse weather, unavailability of materials or of
skilled labor, and by the financial insolvency of the builder or any
subcontractors prior to completion of construction. Such factors can result in
increased costs of a project, corresponding depletion of AmREIT's offering
proceeds, working capital reserves and/or cash from operations and could
possibly result in the loss of permanent mortgage loan commitments relied upon
as a primary source for repayment of construction loans.
AmREIT may use one or more of the following techniques to reduce the risk
of any non-performance by the builder and to assure compliance with approved
plans and specifications: (1) a labor and material bond, a completion bond or a
performance bond, or more than one of the foregoing, may be required; (2) if in
management's opinion, the financial position of the builder so represents, a
personal guaranty or pledge of other assets may be accepted in lieu of, or
required in addition to, a bond; (3) in some cases, the builder of the Property
will be required to leaseback the Property from AmREIT until construction is
completed with lease payments designed to return to AmREIT a portion of its
funds paid to the builder during construction and to require the builder to
bear the risk of construction; (4) where possible, AmREIT
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will purchase Property subject to the construction loan and the Directors will
endeavor not to have AmREIT be liable on such loan; and (5) depending on the
financial condition of the builder, the contract may provide that portions of
the purchase price payments to the former owners will be withheld until a
notice of completion of construction is obtained.
PROPERTY SALE AND DISPOSITION STRATEGY. AmREIT intends to sell some
Properties over time. The determination of whether a particular Property should
be sold or otherwise disposed of will be made after consideration of
performance of the Property and market conditions and will depend, in part, on
the economic benefits of continued ownership. In deciding whether to sell
Properties, management will consider factors such as potential capital
appreciation, cashflow and federal income tax consequences. Affiliates of
AmREIT or of one or more of its Directors may be selected to perform various
substantial real estate brokerage functions in connection with the sale of
Properties by AmREIT. AmREIT will not sell or lease any Property to the
Directors or their Affiliates.
Management will periodically review the assets comprising AmREIT's
portfolio. AmREIT has no current intention to dispose of any of its properties
or other properties acquired in the Merger unless the sale of properties is
necessary or appropriate because of liquidity problems. AmREIT reserves the
right to dispose of any of the properties or any property that may be acquired
in the future if the Directors, based in part upon management's periodic
reviews, determines that the disposition of such property is in the best
interests of AmREIT.
Any net proceeds from the sale of any Property may, at the election of
the Directors, based upon their then current evaluation of the real estate
market conditions, either be distributed to the Shareholders or be reinvested
in other Properties. A reinvestment in other Properties would be feasible only
if it could be accomplished so that the status of AmREIT as a REIT would not be
adversely affected. Any Properties in which net proceeds from a sale are
reinvested will be subject to the same acquisition guidelines as Properties
initially acquired by AmREIT. See "PROPERTIES."
In connection with the sale of a Property owned by AmREIT, purchase money
obligations secured by mortgages may be taken as partial payment. The terms of
payment to AmREIT will be affected by custom in the area in which the Property
being sold is located and the then prevailing economic conditions. To the
extent AmREIT receives notes and property other than cash on sales, such
proceeds will not be included in net proceeds of sale until and to the extent
the notes or other property are actually collected, sold, refinanced or
otherwise liquidated. Therefore, dividends to Shareholders of the proceeds of a
sale may be delayed until the notes or other property are collected at
maturity, sold, refinanced or otherwise converted to cash. AmREIT may receive
payments (cash and other property) in the year of sale in an amount less than
the full sales price and subsequent payments may be spread over several years.
The entire balance of the principal may be a balloon payment due at maturity.
For federal income tax purposes, unless AmREIT elects otherwise it will report
the gain on such sale ratably as principal payments are received under the
installment method of accounting.
BORROWING POLICIES. In the exercise of their duties, the Directors may
elect to borrow funds on behalf of AmREIT in order to take advantage of
particular acquisition opportunities, cover the cost of improving a Property,
cover costs not met by insurance or cover operating costs. The amount of
borrowings will be determined from time to time based on a number of factors,
including the use of the proceeds, the lender's restrictions, the likelihood
that the loan can be readily serviced from rents at the Property where the
proceeds are applied and similar considerations. The Directors will not borrow
funds
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in order to use the proceeds from the borrowing to pay dividends to AmREIT's
Shareholders, unless such borrowings are necessary for REIT qualification
purposes.
AmREIT may not borrow from a Director, officer or any Affiliate thereof,
unless a majority of Directors, including a majority of Independent Directors,
not otherwise interested in such transaction approve the transaction as being
fair, competitive, and commercially reasonable and no less favorable to AmREIT
than loans between unaffiliated parties under the same circumstances.
AmREIT will not issue any senior securities nor will it invest in junior
mortgages, junior deeds of trust or similar obligations.
CONFLICT OF INTEREST AND AFFILIATE TRANSACTION POLICY. Mr. Taylor is
prohibited from engaging in competitive real estate activities, including any
real estate acquisitions, development or management activities in connection
therewith, during his employment with AmREIT, except as may be approved by the
Independent Directors.
AmREIT will not enter into any transactions, including, without
limitation, loans, acquisitions or sales of property, joint ventures and
partnerships, in which AmREIT or a subsidiary is a party and in which any
officer, director, principal security holder or Affiliate has any direct or
indirect pecuniary interest, unless such transaction is approved by a majority
of the Independent Directors after full disclosure of such interests. In
determining whether to approve the transaction, the Independent Directors will
condition such approval on the transaction being fair and reasonable to AmREIT
and, to the extent deemed relevant by such Independent Directors, on terms no
less favorable to AmREIT than prevailing market terms and conditions for
comparable transactions. Independent Directors will be considered to be
disinterested for this purpose provided they have no direct or indirect
pecuniary interest in the transaction.
DIVIDEND REINVESTMENT PLAN
AmREIT intends to institute a dividend reinvestment program, and may from
time to time repurchase Shares in the open market for the purposes of
fulfilling its obligations under the program or may elect to issue additional
Shares.
EMPLOYEES
AmREIT currently has 8 full-time employees, one full-time consultant and
4 independent contractor consultants. AmREIT considers its relations with its
employees to be good.
COMPETITION
AmREIT's properties are predominantly located in the Southwest and, in
particular, the Houston and Dallas metropolitan areas. All of AmREIT's
properties are located in areas that include competing properties. The number
of competitive properties in a particular area could have a material adverse
effect on both AmREIT's ability to lease space at any of its properties or at
any newly developed or acquired properties and the rents charged. AmREIT may be
competing with owners, including, but not limited to, other REITs, insurance
companies and pension funds that have greater resources than AmREIT. There is
no dominant competitor in any of AmREIT's markets.
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<PAGE>
PROPERTIES
AmREIT currently owns 14 properties consisting of single structure retail
properties, each of which is under lease to a regional or national tenant.
When entered into, each lease was long-term. Each lease is a net lease
requiring the tenant to pay all or substantially all expenses related to
operation of the property. To date, AmREIT has not sold any of its properties.
Information concerning the properties owned by AmREIT as of March 31, 1998, is
presented in the following tables.
AMREIT PROPERTY INFORMATION
<TABLE>
<CAPTION>
CURRENT LEASE
DATE PURCHASE PERCENT LEASABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE OWNED(1) AREA RENT DATE
- ------------------- -------- ----------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Radio Shack (Dallas, TX.) 06/15/94 $ 1,062,000 100% 5,200 $ 108,900 11/30/06
Church's (Atl.,GA) 07/22/94 790,000 100% 2,200 90,792 07/22/14
Blockbuster (Ind., MO) 11/14/94 850,000 54.84%(2) 14,047 93,516 04/30/04
OneCare (Houston.,TX) 7/1/95 1,680,000 100% 14,000 180,600 09/30/05
Blockbuster (Wich.,KS) 9/12/95 867,000 51%(3) 15,158 95,868 12/31/04
Just For Feet, (Tuc.,AZ) 9/11/96 1,739,000 51.9%(4) 19,550 197,720 09/30/16
Bank United - (Wdlds.,TX) 09/23/96 255,000 51%(3) 3,685 27,568 09/30/11
Bank United - (West.,TX) 12/11/96 828,000 100% 3,685 88,964 12/31/11
Just For Feet (BtnRg.,LA) 6/9/97 1,431,000 51%(3) 20,575 153,275 05/15/12
Hollywood Video (Laft.,LA) 10/31/97 838,000 74.58%(3) 7,488 100,466 09/24/12
Hollywood Video (Ridgld,MS) 12/30/97 1,208,000 100% 7,488 138,453 12/22/12
OfficeMax (Lake Jksn.,TX) 02/20/98 2,256,000 100% 23,500 230,304 12/31/12
OfficeMax (Dover, DE) Under Develop. 2,644,000* 100% 23,500* 264,375* 4/1/13*
Just For Feet (Wdlds.,TX) Under Contract 3,365,000* 100% 16,922 354,684* 4/1/13*
Just For Feet (Sgrlnd.,TX) (5) 3,141,000* 100% 16,922* 332,352 5/1/13*
------ ----------- ------- ----------
TOTAL $22,924,000 193,920 $2,457,837
</TABLE>
* Estimated
(1) Amounts reflect percentage of property owned.
(2) Owned in joint venture with FUND X.
(3) Owned in joint venture with FUND XI.
(4) Owned in joint venture with FUND X and FUND XI.
(5) Under contract to be acquired.
- ----------
The following table summarizes the minimum future rentals, exclusive of
any renewals, under AmREIT's leases in existence at December 31, 1997.
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<PAGE>
<TABLE>
<S> <C>
1998 $ 1,840,891
1999 1,870,044
2000 1,898,297
2001 1,913,995
2002 1,968,960
2003-2016 $16,409,889
</TABLE>
The following table summarizes rental income by lessee for 1997 and 1998
under AmREIT's leases.
<TABLE>
<CAPTION>
1997 1998
---------- --------
<S> <C> <C>
Tandy Corporation (Mesquite, TX) $ 108,900 $108,900
America's Favorite Chicken Company (Smyrna, GA) 97,931 91,875
Blockbuster Music Retail, Inc. (Independence MO; Wichita, KS) 377,901 377,901
OneCare Health Industries, Inc. (Houston, TX) 201,638 201,638
Just For Feet, Inc. (Tucson, AZ; Baton Rouge, LA) 590,192 123,244
Bank United (The Woodlands, TX; Houston, TX) 157,801 21,230
Hollywood Entertainment Corp. (Lafayette, LA; Ridgeland, MS) 22,452 ---
TOTAL $1,556,815 $924,788
</TABLE>
- ----------
DEBT
At March 31, 1998, AmREIT had approximately $8,918,884 of indebtedness,
all of which was unsecured. Approximately $8,768,884 of such borrowings are
pursuant to a credit facility of up to $15,000,000 with Compass Bank, Houston,
Texas. The actual amount available under the credit facility is dependent on
certain covenants such as the value of AmREIT's unencumbered assets. The
credit facility currently bears interest at 200 basis points over the varying
London Interbank Offered Rates ("LIBOR").
MANAGEMENT
The directors and executive officers of AmREIT are as follows:
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<PAGE>
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE POSITION HELD OFFICER SINCE
---- --- ------------- -------------
<S> <C> <C> <C>
H. Kerr Taylor 47 President 1993
Chief Executive Officer
Director
Robert S. Cartwright, Jr. 48 Director 1993
George A. McCanse, Jr. 44 Director 1993
Timothy Kelley 50 Vice President of Operations 1996
L. Larry Mangum 33 Vice Present, Treasurer 1996
Randall Garbs 44 Vice President of 1994
Acquisitions
</TABLE>
- ----------
H. Kerr Taylor serves as the President and Chairman of the Board of
Directors of AmREIT. Mr. Taylor has served in this capacity since AmREIT's
formation. Mr. Taylor is a graduate of Trinity University. Mr. Taylor also
received a Masters of Business Degree from Southern Methodist University and a
Doctor of Jurisprudence from South Texas College of Law. Mr. Taylor has over
twenty years experience and has participated in over 300 real estate
transactions. Mr. Taylor has served on a board and governing bodies of a bank,
numerous private and public corporations and charitable institutions. Mr.
Taylor was the president, the sole director and sole shareholder of American
Asset Advisers Realty Corporation (the "Adviser"), a real estate operating
company he founded in 1988, prior to its acquisition by AmREIT. Mr. Taylor is
currently a general partner or principal of a general partner of the eleven
affiliated limited partnerships. Mr. Taylor is a member of the National Board
of Realtors, Texas Association of Realtors and Texas Bar Association.
Robert S. Cartwright, Jr. is currently a Professor of Computer Science at
Rice University. He earned a bachelor's degree magna cum laude in Applied
Mathematics from Harvard College in 1971 and a doctoral degree in Computer
Science from Stanford University in 1977. From September 1976 until June 1980,
he was Assistant Professor of Computer Science at Cornell University. In July
1980, he joined the faculty of Rice University as Associate Professor of
Computer Science. He was promoted to the rank of Professor in July 1986.
During his eighteen years as a faculty member at Rice University, he has twice
served as department Chair.
Professor Cartwright has compiled an extensive record of professional
service. He is a Fellow of the Association for Computing Machinery (ACM) and a
member of the ACM Education Board, chairing the ACM Pre-College Education
Committee. He is also a member of the Board of Directors of the Computing
Research Association, an umbrella organization representing academic and
industrial computing researchers. Professor Cartwright has served as a charter
member of the editorial boards of two professional journals and has chaired
several major ACM conferences. From 1991-1996, he was a member of the ACM
Turning Award Committee, which selects the annual recipient of the most
prestigious international prize for computer science research.
George A. McCanse, Jr. is the President of Valuation OnLine, Inc., an
online computer communications and data access service for the commercial real
estate valuation industry. Mr. McCanse is a member of the Appraisal Institute
(MAI designation) and the International Council of Shopping Centers. He was
formally a member of the Valuation Committee of the National Council of Real
Estate
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<PAGE>
Investment Fiduciaries. Mr. McCanse resides in New Canaan, Connecticut. He
holds a BBA degree from the University of Texas and has pursued graduate level
study in real estate, architecture and finance. He has also been involved in
real estate investing and development, including the acquisition and sale of
over $150,000,000 of real estate during the 1970s and 1980s.
L. Larry Mangum serves as Vice President and Treasurer of AmREIT. Mr.
Mangum served as Vice President of Finance of the Adviser. Mr. Mangum was
responsible for the financial accounting and reporting relating to the
Adviser-sponsored partnerships and their properties. He has over ten years of
accounting experience, including four years with a public accounting firm. He
previously worked for American General Corporation, a national insurance
company, from 1991-1996 as part of a team responsible for supervising their
reporting activities. Mr. Mangum received a B.B.A. degree in accounting from
Stephen F. Austin State University and subsequently earned the CPA designation.
Tim Kelley served as Vice President of Operations of the Adviser, and
currently he serves as Vice President of Operations of AmREIT. Mr. Kelley's
career spans over twenty years of debt and equity industry experience. Mr.
Kelley has held senior management, compliance and sales responsibilities in
Broker/Dealers and in investment banking firms including Lehman Brothers Kuhn
Loeb, Oppenheimer and Co., Inc., and McKenna and Company. Mr. Kelley holds
the series 24, 27, 7, 3, 15, and 63 NASD licenses. He received his B.S. degree
from Kent State University.
Randal Garbs served as Vice President of Acquisitions of the Adviser, and
currently he serves as Vice President of Acquisitions of AmREIT. Mr. Garbs is
responsible for property acquisitions as well as marketing services to its
tenants and developers. Mr. Garbs has over twenty years experience in
marketing, including acting as CEO of a Houston based service company. Mr.
Garbs has earned the series 7 and 63 NASD licenses, the Texas Real Estate
license and is a candidate for the CCIM designation. Mr. Garbs received his
B.S. and M.B.A. from Houston Baptist University.
Other individuals who are specialists in their respective fields will be
periodically employed by AmREIT and engaged on an as-needed basis to perform
services on behalf of AmREIT. These individuals are not employees of AmREIT
nor are they employees of other Adviser-sponsored partnerships, although they
do perform various services and activities for those partnerships. These
individuals are:
Don Grieb serves as the Director of Development and Acquisitions of
AmREIT and previously served in the same capacity with the Adviser. Mr. Grieb
has over twenty years experience within the real estate industry including
development, investment analysis and administration. Mr. Grieb has served
within management of such real estate firms as Hines Interests and AEW. Mr.
Grieb received his B.S. and M.B.A. from the University of Illinois and is a
registered architect.
Jane Costello is a certified public accountant and special consultant to
AmREIT regarding tax accounting issues. She previously served in the same
capacity for the Adviser. Ms. Costello has over eighteen years experience as
an accountant including over 4 years with a national public accounting firm and
the last eight years with her own accounting practice. Ms. Costello received a
B.B.A. degree in accounting from the University of Texas.
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<PAGE>
EXECUTIVE COMPENSATION
No executive officer of AmREIT received any salary or bonus from AmREIT
during the year ended December 31, 1997. See Note 8 in the accompanying
financial statements for a description of related party transactions. The
overall management decisions for the day-to-day business affairs of AmREIT are
made by AAA under the direction of the Board of Directors.
AmREIT paid each Director a fee ranging from $500 to $750 for meetings
in which they participated and, where applicable, reimbursed directors for
travel expenses. In addition, AmREIT paid each independent Director an
additional $1,000 per meeting attended in 1997 in recognition of the additional
time and effort expended in consideration of certain potential acquisitions.
There is no other basis of compensation for the Directors. During 1997, a total
of $19,250 was paid as Directors' Fees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 10, 1998, the beneficial
ownership interest of the Executive Officers and Directors of AmREIT:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS(1)
-------------- ------------------- ----------------------- -----------
<S> <C> <C> <C>
Common Stock H. Kerr Taylor 252,250 Shares 10.62%
5300 Mercer
Houston, TX 77005
Common Stock George McCanse, Jr. 770 Shares Less than 1%
128 Orchard Street
New Canaan, CT 06840
Common Stock Robert S. Cartwright, Jr. 2,166 Shares Less than 1%
3310 Underwood
Houston, TX 77025
Officers and Directors 255,186 Shares 11.28%
</TABLE>
(1) Based on 2,374,305 Shares outstanding as of June 5, 1998.
- ----------
As of March 17, 1998, no other person was known by AmREIT to be the
beneficial owner of more than 5% of the Shares of AmREIT.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective June 5, 1998, AmREIT issued to Mr. Taylor 213,260 Shares and
the right to receive up to an additional 686,740 Shares, subject to certain
conditions, in connection with the Adviser Acquisition. See "RECENT
DEVELOPMENTS - Acquisition of the Adviser" below.
On May 10, 1998, Mr. Taylor agreed to accept 18,789 Shares of AmREIT's
common stock in payment in full of a Note payable to him by AmREIT with the
unpaid balance of approximately $171,500.
On August 8, 1997, AmREIT entered into a loan agreement as the lender
with AmREIT Development Corp., an entity with common management, in the amount
of $2,247,254 for the purpose
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<PAGE>
of developing a property in Lake Jackson, Texas that was acquired by AmREIT
upon completion. As of December 31, 1997, $1,928,974 was outstanding on the
loan. The loan bears interest at the prime lending rate and matures on
_______, 1998.
On September 18, 1997, AmREIT had entered into a loan agreement as the
lender with Centurion Video, Ltd. in the amount of $1,153,794 for the purpose
of developing a property in Ridgeland, Mississippi that was acquired by AmREIT
upon completion of development. The loan bore interest at the prime lending
rate plus .5%. AAA Net Developers, Ltd., an entity with common management, was
the limited partner in Centurion Video, Ltd. The loan was repaid in full as of
December 31, 1997.
For further information see Notes 4, 8 and 9 to the financial statements
and see the MANAGEMENT AND AFFILIATE COMPENSATION section of AmREIT's
Prospectus dated June 18, 1996.
LEGAL PROCEEDINGS
Neither AmREIT nor any of its properties is subject to any claim or legal
proceeding, nor to management's best knowledge, is any such claim or legal
proceeding threatened.
RECENT DEVELOPMENTS
ACQUISITION OF THE ADVISER. As of June 5, 1998, AmREIT became a
self-managed REIT by acquiring its former Adviser, American Asset Advisers
Realty Corporation (the "Adviser Acquisition"). As a self-managed REIT, AmREIT
acquires, develops and manages its own real property investments and internally
administers its affairs and activities.
AmREIT acquired the Adviser pursuant to a merger of, AAARC, the Adviser,
into AmREIT's newly formed wholly-owned subsidiary corporation, AmREIT
Operating Corporation, which is the surviving corporation. Pursuant to the
Acquisition, Mr. H. Kerr Taylor, the sole shareholder of AAARC, will receive up
to 900,000 shares of AmREIT's Common Stock (the "Share Consideration"), of
which 213,260 Initial Shares will be issued upon consummation of the Adviser
Acquisition (the "Closing Date"). Up to an additional 686,740 shares would be
issuable over the 24 calendar quarters immediately following the Closing Date,
subject to the satisfaction of certain conditions. The Adviser Acquisition was
approved by AmREIT's Shareholders on June 5, 1998.
AAARC had served as adviser to AmREIT since AmREIT's organization in May
1994. Under the direction of the Board, AAARC has the responsibility for the
day-to-day operations of AmREIT, including raising capital, the investigation
and identification of investment acquisitions, the negotiation of acquisitions,
due diligence in investment research, property management and administrative
and accounting services.
AAARC was organized on April 4, 1989 and since that time has been
acquiring, developing, operating and managing real property for its own account
and for the account of managed real estate investment programs, including
AmREIT. In addition to AmREIT, AAARC co-sponsored with Mr. Taylor each of the
Partnerships. In addition to services for AmREIT, the Adviser provided
acquisition, management and administrative services to the Partnerships and
development and management services to AmREIT Development Corp, a Texas
corporation owned by Mr. Taylor and to AAA Net Developers, Ltd., a privately
held Texas limited partnership for which Mr. Taylor and AmREIT Development
Corp,
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<PAGE>
serve as general partners. AAA Net Developers, Ltd. is in the business of
developing for resale, frontage retail properties under net lease to retail
tenants.
For the three months ended March 31, 1998 and the year ended December 31,
1997, revenues to AAARC from all sources aggregated $156,198, and $1,602,580,
respectively. These amounts included payments from AmREIT of $73,088 and
$1,166,309 during the three (3) months ended March 31, 1998, respectively and
the year ended December 31, 1997, respectively. For the same periods, AAARC
incurred total expenses of $200,670, and $1,473,676, respectively. These
expenses are not allocated between services provided by AAARC under the
services agreements with AmREIT and the Partnerships vs. the AAARC's other
activities.
Also, AAARC incurred certain costs in connection with the organization
and syndication of AmREIT. Reimbursement of these costs become obligations of
AmREIT in accordance with the terms of the offering. Costs of $164,985 and
$98,494 were incurred by AAARC in 1997 and 1996, respectively, in connection
with the issuance and marketing of AmREIT's stock.
Consequences of Acquisition. As a self-managed REIT, AmREIT no
longer pays any of the Adviser Fees and pays directly for the overhead
necessary to provide the services that AAARC provided under the Omnibus
Services Agreement. By acquiring the AAARC's staff and facilities, AmREIT now
has personnel with substantial experience and long-term relationships in the
commercial net leased property industry, including but not limited to
relationships with both AmREIT's significant tenants and those of the
Partnerships. Management believes these capabilities provide AmREIT with a
competitive advantage over many larger and more established REITs in the
management and operation of properties and in the identification and
acquisition of attractive investments.
Following the Adviser Acquisition, AmREIT, through AmREIT Operating
Corporation, continues to provide these services, including administrative and
management services to the Partnerships and administrative and development
services, facilities and personnel to AmREIT Development Corp. However, its
ability to do so may be significantly limited under current and possible future
changes to the REIT Rules. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES".
AmREIT, through AmREIT Operating Corporation, and/or other Affiliates,
also conducts various real estate development activities both for its account
and for the accounts of others, including AmREIT Development Corp. Through the
Adviser Acquisition, AmREIT acquired expertise and ability to develop
properties for tenants in order to be more competitive in obtaining attractive
acquisitions for itself and the AAARC's other affiliates. Management believes
that its ability to competitively construct and deliver completed properties on
a timely basis will continue to be an important consideration for many actively
growing and expanding retail and commercial tenants.
Terms of the Acquisition. The Adviser Acquisition was approved
and recommended to AmREIT's shareholders by the Independent Directors. AmREIT's
shareholders approved the Adviser Acquisition on June 5, 1998. In finding that
the Adviser Acquisition was fair to AmREIT and its shareholders, the
Independent Directors engaged Bishop-Crown as their financial adviser to advise
them in analyzing and evaluating, and to provide a written opinion with respect
to, the fairness of the Acquisition to AmREIT and to the shareholders of AmREIT
(other than Mr. Taylor). The Independent Directors obtained a fairness
opinion from Bishop-Crown that the Adviser
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<PAGE>
Acquisition was fair from a financial point of view, to AmREIT and its
Shareholders (other than Mr. Taylor). The Independent Directors engaged
Broocks, Baker & Lange, LLP ("Broocks Baker") to advise them regarding,
but not to negotiate, the terms of the Adviser Acquisition.
Under the Acquisition Agreement, AmREIT has agreed to issue up to 900,000
Common Shares as the Share Consideration for the Adviser Acquisition. AmREIT
issued the 213,260 Initial Shares on the Closing Date and will issue up to the
Share Balance of 686,740 shares, subject to adjustment as described below, as
follows: No later than thirty (30) days after the end of the calendar quarter
in which the Closing Date occurred, and within thirty (30) days after the end
of each calendar quarter thereafter until the twenty-fourth (24th) consecutive
calendar quarter following the Closing Date, or, if sooner, until the entire
Share Balance has been issued. AmREIT will issue a portion of the then unissued
Share Balance (the "Remaining Share Balance") equal to, when added to the
aggregate shares of the Share Consideration theretofore issued, 9.8% of the
total number of Common Shares outstanding at the end of the respective calendar
quarter after giving effect to the issuance of such additional shares.
At the Closing Date of the Acquisition, Mr. Taylor owned 252,250 shares
of AmREIT's common stock which represents approximately 10.62% of AmREIT's
total outstanding shares. For the 24 calendar quarters following the Closing
Date, Mr. Taylor's additional share ownership by reason of his receipt of the
Share Consideration cannot exceed the number of shares which represent 9.8% of
AmREIT's total outstanding shares.
The Acquisition Agreement requires that, in the event of Mr. Taylor's
death, AmREIT must promptly purchase from his estate his right, title and
interest in the Remaining Share Balance at a price determined on a value of
$10.25 per share or, if AmREIT's Common Shares are then traded in a national
securities market, the average closing price of AmREIT's Common Shares on the
ten (10) consecutive trading days preceding the date of death, whichever is
greater. To fund this obligation, AmREIT must maintain one or more insurance
policies, payable to AmREIT, insuring Mr. Taylor's life in the amount necessary
to purchase the Remaining Share Balance.
The foregoing notwithstanding, the Remaining Share Balance is immediately
issuable in the event any of the following should occur:
(i) An event which results in or is likely to result in a Change
in Control of AmREIT;
(ii) The failure by AmREIT to timely issue the Share Balance, or
any portion thereof as required above;
(iii) In the event Mr. Taylor's employment by AmREIT is terminated
without cause as defined in his employment agreement with
AmREIT then in effect; or
(iv) AmREIT's failure to purchase, upon the death of Mr. Taylor,
all of his right, title and interest in the Remaining Share
Balance, which interest will be valued as of the date of
death at the greater of $10.25 per share or, if the common
shares are traded in a national securities market, the
average closing price of such shares during the ten (10)
consecutive trading days immediately preceding the date of
death. Under the Acquisition Agreement, AmREIT is required
to maintain insurance on the life of Mr. Taylor to fund this
obligation.
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<PAGE>
For the purposes of the foregoing, a "Change in Control" means (i) the
sale or transfer of substantially all of the assets of AmREIT, whether in one
transaction or a series of transactions, except a sale to a successor
corporation in which the stockholders immediately prior to the transaction
hold, directly or indirectly, at least 50% of the total voting power of the
successor corporation immediately after the transaction, (ii) any merger or
consolidation between AmREIT and another corporation immediately after which
the stockholders hold, directly or indirectly, less than 50% of the total
voting power of the surviving corporation, (iii) the dissolution or liquidation
of AmREIT, (iv) the acquisition by any person or group of persons of direct or
indirect beneficial ownership of AmREIT's common shares representing more than
50% of AmREIT's common shares, or (v) the date the Board Changes. For the
purposes of the foregoing, a "Board Change" means the date that a majority of
the Board is comprised of persons other than persons (i) whose election
Consents shall have been solicited by management, or (ii) who are serving as
directors appointed by the Board to fill vacancies caused by death or
resignation (but not by removal) or to fill newly created directorships.
Under the Acquisition Agreement, so long as Mr.Taylor serves as an
officer or director of AmREIT he may not, without AmREIT's express
authorization, engage or participate directly or indirectly as a principal,
agent, or owner (including serving as a partner of or owning any stock or other
equity investment or debt of) any Competitive Real Estate Venture, as defined.
Excluded from the foregoing are Competitive Real Estate Ventures in which Mr.
Taylor is currently interested, including AAA Net Developers, Ltd. and the AAA
Partnerships and their respective general partners. Also excluded from the
foregoing restriction is the present or future ownership of not more than one
percent (1%) of the total outstanding class of equity or debt securities of any
Competitive Real Estate Venture whose equity or debt securities are publicly
traded.
"Competitive Real Estate Venture" is defined as any enterprise entered
into for profit whose activities in at least material part consist of the
acquisition, development, ownership and/or management of real estate leased or
intended to be leased to commercial or retail tenants.
Under the Acquisition Agreement, Mr. Taylor entered into full-time
employment by AmREIT. His annual base salary for 1998 and 1999 is $25,000 and
$30,000, respectively. Mr. Taylor may not receive any compensation from any
Competitive Real Estate Venture under his control except as may, from time to
time, be approved by the Board. It is the Board's intent to use this
restriction to limit the aggregate compensation received by Mr. Taylor from
AmREIT and his other controlled Competitive Real Estate Ventures, if any.
Expressly excluded from the foregoing agreement would be any compensation in
connection with Mr. Taylor's ownership of the general partners of the
Partnerships.
In an effort to eliminate existing and potential conflicts of interest
between Mr. Taylor and AmREIT, Mr. Taylor agreed to cause any Competitive Real
Estate Venture (as defined) over which he has control, including the general
partners of the Partnerships and AmREIT Development Corp, to, at the election
of the Board, contract for acquisition and management services and/or the use
of facilities and personnel with AmREIT or such affiliated provider as may be
designated by the Board. Any such contracts are subject to the requirements
and restrictions on such contracts as may be provided in each entities
organizational documents. AmREIT, through AmREIT Operating Corporation,
currently provides property management, general administration and acquisition
services, real estate brokerage services and support personnel and/or
facilities to these entities. However, its ability to do so may be
significantly limited under current and possible future changes to the REIT
Rules. Under this requirement, Mr. Taylor must cause such Competitive Real
Estate Venture to first satisfy its requirements for personnel and/or
facilities by the use
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of available, qualified facilities and personnel of AmREIT or its Affiliates on
a reimbursement for use basis.
Also, Mr. Taylor must cause such Competitive Real Estate Venture to offer
to AmREIT the right to purchase any property which the Competitive Real Estate
Venture acquires or contracts to acquire, subject to its then-existing
fiduciary obligations to any other persons at a price equal to the cost of the
property to the Competitive Real Estate Venture.
AMREIT CHARTER AND BYLAWS
The following is a summary of AmREIT's Amended and Restated Certificate
of Incorporation or Charter and the Bylaws and is qualified in its entirety by
reference to the complete text of the Charter and the Bylaws.
AUTHORIZED STOCK
The Charter provides that AmREIT is authorized to issue 110,000,000
shares, consisting of 100,000,000 shares of $0.01 par value Common Stock and
10,000,000 shares of preferred stock, par value $.01 per share ("Company
Preferred Stock"). Shares of Preferred Stock may be issued from time to time,
in one or more series, each of which series shall have such voting powers,
designations, preferences and rights, and the qualifications, limitations or
restrictions relating thereto, as shall be authorized by the Board of
Directors. See "DESCRIPTION OF AMREIT'S CAPITAL STOCK."
DIRECTORS
The Bylaws provide that the number of directors shall consist of not less
than three or more than nine members, the exact number of which shall be fixed
by the Board from time to time. The Bylaws provide that, except as otherwise
provided by law or the Charter, a quorum of the Board for the transaction of
business shall consist of a majority of the entire Board. The act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board. The Charter and the Bylaws do not provide for a classified
board or for cumulative voting in the election of directors to the Board. The
Bylaws provide that vacancies and any newly-created directorships resulting
from an increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director.
SHAREHOLDER MEETINGS AND SPECIAL VOTING REQUIREMENTS
The Annual Meetings of Shareholders are held on such date as shall be
fixed by the Board. The Bylaws specify such date to be not fewer than 30 days
nor more than 61 days after delivery of AmREIT's annual report to Shareholders.
Special meetings of Shareholders may be called only upon the request of a
majority of the Directors, a majority of the Independent Directors, the
President, or upon the written request of Shareholders entitled to cast at
least 10% of all of the votes entitled to be cast at such meeting. In general,
the presence in person or by proxy of Shareholders entitled to cast a majority
of votes shall constitute a quorum at any Shareholders' meeting. The Charter
and the Bylaws may in general be amended by a Majority Vote of the
Shareholders. However, an amendment of any provision of the Charter or Bylaws
which requires a greater than majority vote must itself be approved by a vote
of the Shareholders holding shares representing at least 66-2/3% of the votes
entitled to be cast thereon.
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Other matters on which the Shareholders are entitled to vote include: (i)
the election and removal of Directors; (ii) a voluntary change in AmREIT's
status as a REIT; and/or (iii) the dissolution of AmREIT.
A majority of the Directors (including a majority of the Independent
Directors) may in their discretion, from time to time, amend, without a
Shareholder vote, certain portions of the Bylaws, but not a Stated Investment
Policy. The Shareholders may amend the Bylaws by a Majority Vote.
AMENDMENT OF THE CHARTER AND BYLAWS
The MGCL and the Charter provide that approval of a majority of the
shareholders entitled to vote thereon is required to amend the Charter. A bylaw
may be amended or repealed, or a new bylaw adopted, by (i) the affirmative vote
of the holders of a majority of the stock entitled to vote thereon, or (ii) a
majority of the Board.
TRANSACTIONS WITH INTERESTED OFFICERS OR DIRECTORS
The Bylaws will provide, in accordance with the MGCL, that contracts or
transactions between AmREIT and a director or officer of AmREIT or a
corporation or entity in which such officer or director is also an officer or
director or has a financial interest, are not void or voidable solely for such
reason or solely because the officer or director is present at or participates
in any meeting of the Board which authorizes the transaction or contract, or
solely because such officer's or director's vote is counted for such purpose,
if the Bylaw restrictions regarding such transactions are satisfied (see
discussion under Stated Investment Policies above) and (i) the material facts
as to his relationship or interest are disclosed or are known to the Board or a
committee and the Board or a committee in good faith authorizes such contract
or transaction; (ii) the material facts as to his relationship or interest are
disclosed or are known to the shareholders entitled to vote thereon and the
shareholders in good faith specifically approve such contract or transact; or
(iii) the contract or transaction is fair to AmREIT at the time it is
authorized, approved or ratified by the Board, a committee or the shareholders.
In addition, the Bylaws will provide that any transactions with interested
directors or officers or their affiliates shall be made on commercially
reasonable terms substantially equivalent to terms available from third parties
in an arm's-length transaction in the competitive marketplace.
ROLLUP TRANSACTIONS
AmREIT's Bylaws contain certain restrictions and requirements on AmREIT's
ability to participate in "Rollup" transactions as defined. Prior to the
Effective Date, if the Merger is approved by AmREIT's shareholders, the Bylaws
will be amended to expressly approve the Merger and, expressly exclude the
Merger transactions from the requirements of the Rollup Provisions of the
Bylaws to the extent they would otherwise apply to the Merger transactions.
LIMITATIONS ON HOLDINGS AND TRANSFER
For AmREIT to continue to qualify as a "REIT" under the Code, not more
than 50 percent of its outstanding Shares may be owned by five or fewer
individuals during the last half of each year and outstanding Shares must be
owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year except with
respect to the first taxable
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year for which an election to be treated as a REIT is made. The Charter
restricts the accumulation or transfer of Shares if any accumulation or
transfer could result in any person beneficially owning, in accordance with the
Code, in excess of 9.8% of the then outstanding Shares, or could result in
AmREIT being disqualified as a "REIT" under the Code. Such restrictions
authorize the Board to refuse to give effect to such transfer on AmREIT's books
as to Shares accumulated in excess of the 9.8% ownership limit. Although the
intent of these restrictions is to preclude transfers which would violate the
ownership limit or protect the AmREIT's status as a REIT under the Code, there
can be no assurance that such restrictions will achieve their intent.
A transferee who acquires Shares in a restricted transfer is required to
indemnify, defend, and hold AmREIT and its other Shareholders harmless from and
against all damages, losses, costs, and expenses, including, without
limitation, reasonable attorneys' fees, incurred or suffered by AmREIT or such
Shareholders by virtue of AmREIT's loss of its qualification as a REIT if such
loss is a result of the transferee's acquisition. See "MATERIAL FEDERAL INCOME
TAX ASPECTS".
ANTI-TAKEOVER EFFECT OF AUTHORIZED BUT UNDESIGNATED PREFERRED STOCK
As described above, the Board is authorized to provide for the issuance
of shares of Preferred Stock, in one or more series, and to fix by resolution
of the Board and to the extent permitted by the MGCL, the terms and conditions
of each such series. Management believes that the availability of Preferred
Stock will provide AmREIT with increased flexibility in structuring possible
future financings and acquisitions and in meeting other corporate needs which
might arise from time to time. Authorized but unissued shares of Preferred
Stock, as well as authorized but unissued shares of Common Stock, will be
available for issuance without further action by shareholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which any class of stock may then be listed for
trading.
Although the Board has no present intention of doing so, it will be able
to issue a series of Preferred Stock that could, depending on its terms, either
impede or facilitate the completion of a merger, tender offer or other takeover
attempt. For instance, such new shares might impede a business combination by
including class voting rights which would enable the holder to block such
transaction or facilitate a business combination by including voting rights
which would provide a required percentage vote of shareholders. The Board will
make any determination to issue such shares based on its judgment as to the
best interests of AmREIT and its then existing shareholders. The Board, in so
acting, will be able to issue Preferred Stock having terms which would
discourage an acquisition attempt or other transaction that some or a majority
of the shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then market price
of such stock.
LIABILITY FOR MONETARY DAMAGES
The Charter provides that no director will be personally liable to AmREIT
or its shareholders for monetary damages for breach of fiduciary duty as a
director, other than liability for breach of the duty of loyalty to AmREIT or
its stockholders, acts or omissions not in good faith, intentional misconduct,
a knowing violation of law, certain unlawful dividends, stock repurchases or
redemptions or any transaction from which the director derived an improper
personal benefit. Any repeal or modification of such provision by the
stockholders of AmREIT will not adversely affect any right or protection of a
director existing at
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the time of such repeal or modification with respect to acts or omissions
occurring prior to such repeal or modification.
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The Charter provides for the indemnification of present and former
directors and officers of AmREIT and persons serving as directors, officers,
employees or agents of another corporation or entity at the request of AmREIT
(each, an "Indemnified Party") to the fullest extent permitted by the MGCL.
Indemnified Parties are specifically indemnified in the Charter and the Bylaws
(the "Indemnification Provisions") for expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by an Indemnified Party (I) in connection with a threatened, pending
or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that he is or was a
director or officer of AmREIT or is or was serving as a director, officer,
employee or agent of another corporation or entity at the request of AmREIT, or
(ii) in connection with the defense or settlement of a threatened, pending or
completed action or suit by or in the right of AmREIT, provided that such
indemnification is permitted only with judicial approval if the Indemnified
Party is adjudged to be liable to AmREIT. Such Indemnified Party must have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the subject corporation and, with respect to
any criminal action or proceeding, must have had no reasonable cause to believe
his conduct was unlawful. Any indemnification under the Indemnification
Provisions must be authorized based on a determination that the indemnification
is proper if the applicable standard of conduct has been met by the Indemnified
Party, provided that no such authorization is required, and indemnification is
mandatory, where a director or officer of AmREIT is successful in the defense
of such action, suit or proceeding or any claim or matter therein. Otherwise,
such determination will be made by a majority vote of a quorum of the Board
consisting of directors not a party to the suit, action or proceeding, by a
written opinion of independent legal counsel or by the shareholders. In the
event that a determination is made that a director or officer is not entitled
to indemnification under the Indemnification Provisions, the Indemnification
Provisions provide that the Indemnified Party may seek a judicial determination
of his right to indemnification. The Indemnification Provisions further provide
that the Indemnified Party is entitled to indemnification for all expenses
(including attorneys' fees) incurred in any proceeding seeking to collect from
AmREIT an indemnity claim under the Indemnification Provisions if such
Indemnified Party is successful. Other than proceedings to enforce rights to
indemnification, AmREIT is not obligated to indemnify any person in connection
with a proceeding initiated by such person, unless authorized by the Board.
AmREIT will pay expenses incurred by a director or officer of AmREIT, or
a former director or officer, in advance of the final disposition of an action,
suit or proceeding, if he undertakes to repay amounts advanced if it is
ultimately determined that he is not entitled to be indemnified by AmREIT.
The Indemnification Provisions and provisions for advancing expenses in
the Charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Bylaws. The
Indemnification Provisions and provisions for advancing expenses in the Bylaws
and the Charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to any agreement, vote of
the shareholders or disinterested directors or pursuant to judicial direction.
AmREIT will be authorized to purchase insurance on behalf of an Indemnified
Party for liabilities incurred, whether or not AmREIT would have the power or
obligation to indemnify him pursuant to the Charter, the Bylaws or the MGCL.
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In addition, AmREIT will enter into indemnification agreements with its
directors and certain of its executive officers pursuant to which such persons
are indemnified for costs and expenses actually and reasonably incurred by such
persons in connection with a threatened, pending or completed claim arising out
of service as a director, officer, employee, trustee and/or agent of AmREIT or
another entity at the request of AmREIT.
DESCRIPTION OF AMREIT'S CAPITAL STOCK
GENERAL
AmREIT's authorized capital stock consists of 100,000,000 shares of
Common Stock, $0.01 par value and 10,000,000 shares of Preferred Stock. As of
June 5, 1998, AmREIT had outstanding 2,374,305 shares of Common Stock and no
shares of Preferred Stock.
COMMON STOCK
VOTING RIGHTS. Each holder of Common Stock will be entitled to one vote
for each share registered in his name on the books of AmREIT on all matters
submitted to a vote of shareholders. Except as otherwise provided by law, the
holders of Common Stock will vote as one class. The shares of Common Stock will
not have cumulative voting rights. As a result, subject to the voting rights,
if any, of the holders of any shares of Preferred Stock which may at the time
be outstanding, the holders of Common Stock entitled to exercise more than 50%
of the voting rights in an election of directors will be able to elect 100% of
the directors to be elected if they choose to do so. In such event, the holders
of the remaining shares of Common Stock voting for the election of directors
will not be able to elect any persons to the Board. The Charter and the Bylaws
contain certain provisions that could have an anti-takeover effect. See "AMREIT
CERTIFICATE OF INCORPORATION AND BYLAWS."
DIVIDEND RIGHTS. Subject to the rights of the holders of any shares of
Preferred Stock which may at the time be outstanding, holders of AmREIT Stock
will be entitled to such dividends as the Board may declare out of funds
legally available therefor. Because portions of the operations of AmREIT may be
conducted through wholly-owned subsidiaries, AmREIT's cash flow and consequent
ability to pay dividends on Common Stock may be dependent to some degree upon
the earnings of such subsidiaries and on dividends and other payments
therefrom.
LIQUIDATION RIGHTS AND OTHER PROVISIONS. Subject to the prior rights of
creditors and the holders of any Preferred Stock which may be outstanding from
time to time, the holders of Common Stock are entitled in the event of
liquidation, dissolution or winding up to share pro rata in the distribution of
all remaining assets.
The Common Stock is not liable for any calls or assessments and is not
convertible into any other securities. In addition, there are no redemption or
sinking fund provisions applicable to the Common Stock.
TRANSFER AGENT. The transfer agent and registrar for AmREIT Common Stock
is The Bank of New York, 101 Barclay Street, New York, NY 10286.
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PREFERRED STOCK
The Charter provides that the Board is authorized to provide for the
issuance of shares of Preferred Stock, from time to time, in one or more
series. Prior to the issuance of shares in each series, the Board is required
by the Charter and the MGCL to adopt resolutions and file a Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "Certificate of Designation") with the Secretary of
State of Maryland, fixing for each such series the designations, preferences
and relative, participating, optional or other special rights applicable to the
shares to be included in any such series and any qualifications, limitations or
restrictions thereon, including, but not limited to, dividend rights, dividend
rate or rates, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences as are permitted by Maryland law.
REPORTS TO SHAREHOLDERS
AmREIT provides periodic reports to the Shareholders regarding its
operations over the course of the year. Financial information contained in all
reports to Shareholders will be prepared on an accrual basis of accounting in
accordance with generally accepted accounting principles. Tax information will
be mailed to Shareholders within 30 days following the close of each fiscal
year. AmREIT's annual report, which will include financial statements audited
and reported upon by independent public accountants, will be furnished within
120 days following the close of each fiscal year. The annual financial
statements will contain or be accompanied by a complete statement of any
transactions with any Affiliates, and of compensation and fees paid or payable
by AmREIT to the management and its Affiliates. The information required by
Form 10-Q will be made available to Shareholders within 45 days of the close of
each of the first 3 fiscal quarters of each year.
AmREIT provides the Shareholders that are qualified retirement plans with
an annual statement of value in order to permit them to comply with ERISA
annual reporting requirements. The statement will report the net asset value of
Securities based upon the amount Shareholders would receive if Properties were
sold at their appraised values as of the close of AmREIT's fiscal year and if
such proceeds, together with the other AmREIT funds, were distributed in
liquidation. Until 1999, AmREIT is permitted to value all Properties at cost,
although it is not required to do so. Thereafter, whenever AmREIT is not
offering shares of its Common Stock, it will perform a valuation update based
on capitalization of income for each of its properties unless it previously
obtained an appraisal for such property dated within nine months prior to the
end of the relevant fiscal year. After the first three annual reports, the
Board may elect to deliver such reports to all Shareholders. Shareholders will
not be forwarded copies of appraisals or updates. In providing such reports to
the Shareholders, neither AmREIT nor its Affiliates thereby make any warranty,
guarantee or representation that (1) the Shareholders or AmREIT, upon
liquidation, will actually realize the estimated value per Share, or (2) the
Shareholders will realize the estimated net asset value if they attempt to sell
their Shares.
Shareholders have the right under applicable federal and Maryland law to
obtain certain information about AmREIT and, at their expense, may obtain a
list of names and addresses of the Shareholders. Shareholders have the right
to inspect and duplicate AmREIT's appraisal records. In the event that the SEC
promulgates rules and/or in the event that applicable State securities laws or
the North American Securities Administrators Association ("NASAA") Guidelines
are amended so that, taking such changes into account,
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AmREIT's reporting requirements are reduced, AmREIT may cease preparing and
filing certain of the aforementioned reports if the Directors determine such
action to be in AmREIT's best interests and if such cessation is in compliance
with the rules and regulations of the SEC and applicable State and NASAA
Guidelines, one or more of which may then be amended.
THE PARTNERSHIPS
GENERAL
Each of the Partnerships was sponsored and organized by the General
Partner for the purpose of one or more retail properties under long-term net
lease to creditworthy tenants. Each of the Partnerships is restricted from
using leverage to finance its investments and thus, none of the Partnerships
has any significant debt. Each of the Partnerships was formed for long-term
investment, intending to hold its properties for resale over a 10 to 15 year
period, although each Partnership Agreement provides for a longer term. Each
of the Partnerships was organized under Texas limited partnership law except
for Fund IX and Fund X which were organized under Nebraska limited partnership
law. The Partnerships share executive offices with the General Partner and his
Affiliates, including AmREIT. The following tables provide selected
information regarding the Partnerships.
PARTNERSHIP ORGANIZATION AND CAPITALIZATION
<TABLE>
<CAPTION>
NAME OF NO. OF DATE OF ORIGINAL LIMITED PRICE NO. OF
PARTNERSHIP PARTNERS ORGANIZATION PARTNER CAPITAL PER UNIT UNITS SOLD
- ----------- -------- ------------ ---------------- -------- ----------
<S> <C> <C> <C> <C> <C>
FUND III 43 2/1986 $ 945,000 $30,000 31.50
FUND IV 31 10/1986 615,000 30,000 20.50
FUND V 21 2/1987 480,000 30,000 16.0
FUND VI 13 8/1987 300,000 30,000 10.0
FUND VII 40 3/1988 1,125,100 30,000 37.503
FUND VIII 55 4/1990 1,860,000 30,000 62.0
FUND GDYR 37 10/1990 1,335,000 30,000 44.5
FUND IX 326 6/1990 5,390,500 1,000 5,390.5
FUND X 727 9/1992 11,453,610 1,000 11,453.61
FUND XI 269 5/1994 7,061,209 1,000 7,061.21
</TABLE>
- ----------
PROPERTIES
The real property interests of the Partnerships consist of fee simple
interests owned directly or through joint ventures except for the Atlas Note,
in which Fund III and IV own joint interest of approximately 51.3% and 48.7%,
respectively.
A Secured Note in principal amount of $215,000 payable by Transmark,
Inc., a Texas corporation (the "Atlas Note") bearing interest at the rate of
ten percent (10%) per annum and payable in monthly installment of accrued
interest and principal of $3,000 until October 9, 2006 when the entire balance
of principal and interest is due and payable. The Atlas Note is secured by a
first mortgage lien on a retail
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property under lease to Atlas Tire Stores located in Clute, Texas, which was
formerly jointly owned by Fund IV and Fund V. At March 31, 1998, the unpaid
balance of the Atlas Note was $208,856 in which the interest of Fund IV was
$107,164 and the interest of Fund V was $101,692.
The following tables set forth information regarding the Properties of
each of the Partnerships.
PARTNERSHIP PROPERTY INFORMATION
<TABLE>
<CAPTION>
PERCENTAGE PURCHASE PROPERTY VALUATION
PARTNERSHIP TENANT/USER (LOCATION) OWNED PRICE COMPONENT OF NAV
- ----------- ---------------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
FUND III Steak & Ale (Houston, TX) 44% $ 277,200
Bank of America (Houston, TX) 100% 315,000
Taco Bell (Houston, TX) 100% 136,324
Atlas Note 50.7% 107,164*
----------
TOTAL $ 835,688 $853,602
========== ========
FUND IV Steak & Ale (Houston, TX) 56% $ 352,800
Atlas Note 49.3% 101,692
----------
TOTAL $ 454,492 $535,180
========== ========
FUND V Pizza Inn (Clute, TX) 50% $ 74,809
Whataburger (Clute, TX) 50% 128,899
La Petite Academy (Houston, TX) 6.02% 32,494
TOTAL $ 236,204 $401,854
========== ========
FUND VI Pizza Inn (Clute, TX) 50% $ 74,809
Whataburger (Clute, TX) 50% 128,899
La Petite Academy (Houston, TX) 2.74% 14,771
----------
TOTAL $ 218,479 $268,096
========== ========
FUND VII La Petite Academy (Houston, TX) 91.25% $ 492,734
Whataburger (Dallas, TX) 54.88% 299,095
Superior Sound (Houston, TX) 27.28% 67,649
AFC, Inc./Church's (Houston, TX) 27.28% 57,283
Gannett/Billboard (Houston, TX) 27.28% --
----------
TOTAL $969,953
========
$ 916,761
FUND VIII Whataburger (Dallas, TX) 45.12% $ 245,905
Superior Sound (Houston, TX) 72.72% 180,351
AFC, Inc./Church's (Houston, TX) 72.72% 152,717
Gannett/Billboard (Houston, TX) 72.72% --
Discount Tire (Fort Worth, TX) 100% 358,000
La Petite Academy (Houston, TX) 100% 457,000
Goodyear Tire-Marsh Lane (Dallas, TX) 25.28% 150,149
----------
TOTAL $1,544,122 $1,610,823
========== ==========
AAA GDYR Goodyear Tire-Marsh Lane (Dallas, TX) 74.72% $ 443,851
Goodyear Tire-Hillcrest (Dallas, TX) 100% 555,000
----------
TOTAL $ 998,851 $1,070,014
==========
FUND IX Foodmaker/Jack-in-the-Box (Dallas,TX) 100% $ 565,000
Baptist Memorial Hospital (Memphis,TN) 100% 1,540,000
Waldenbooks/Payless (Austin, TX) 100% 535,000
Golden Corral - I-45 (Houston, TX) 100% 1,575,456
Golden Corral - Hwy 1960 (Houston, TX) 4.80% 74,894
----------
TOTAL $4,290,350 $4,834,313
========== ==========
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE PURCHASE PROPERTY VALUATION
PARTNERSHIP TENANT/USER (LOCATION) OWNED PRICE COMPONENT OF NAV
- ----------- ---------------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
FUND X Golden Corral - Hwy 1960 (Houston,TX) 95.20% $1,485,106
TGI Friday's (Houston, TX) 100% 1,473,461
Goodyear Tire (Houston, TX) 100% 510,000
Computer City (Minneapolis, MN) 100% 2,407,317
AFC, Inc./Popeye's (Atlanta, GA) 100% 834,500
Blockbuster Music (Independence, MO) 45.16% 699,000
Onecare (Sugarland, TX) 100% 1,405,006
Just for Feet (Tucson, AZ) 18.25% 611,394
----------
TOTAL $9,426,758 $10,403,870
========== ===========
FUND XI Blockbuster Video (Wichita, KS) 49% $ 833,000
Blockbuster Video (Oklahoma City, OK) 100% 752,663
Just for Feet (Tucson, AZ) 29.85% 1,000,007
Bank United (The Woodlands, TX) 49% 245,000
Just For Feet (Baton Rouge,LA) 49% 1,375,014
Hollywood Video (Lafayette, LA) 25.42% 285,624
Pier One (Longmont, CO) 100% 1,195,741
----------
TOTAL $5,687,055 $ 6,425,690
========== ===========
</TABLE>
* Unpaid balance of Atlas Note on March 31, 1998.
LEASE INFORMATION
<TABLE>
<CAPTION>
LEASE
PERCENTAGE SQUARE ANNUAL TERMINATION
PARTNERSHIP TENANT/USER (LOCATION) OWNED FOOTAGE(1) RENT(1) DATE
- ----------- ----------- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
FUND III Steak & Ale (Houston, TX) 44% Land Lease $ 19,800 03/22/02
Bank of America (Houston, TX) 100% 2,815 62,370 05/11/00
Taco Bell (Houston, TX) 100% 1,500 35,315 02/28/98
---------- --------
TOTAL 4,315 $117,485
========== ========
FUND IV Steak & Ale (Houston, TX) 56% Land Lease $ 25,200 03/22/02
---------- --------
TOTAL Land Lease $ 25,200
========== ========
FUND V Pizza Inn (Clute, TX) 50% 2,895 $ 12,120 07/31/03
Whataburger (Clute, TX) 50% 1,104 14,543 01/19/00
La Petite Academy (Houston, TX) 6.02% 407 3,493 03/29/04
---------- --------
TOTAL 4,406 $ 30,156
========== ========
FUND VI Pizza Inn (Clute, TX) 50% 2,895 $ 12,120 07/31/03
Whataburger (Clute, TX) 50% 1,104 14,543 01/19/00
La Petite Academy (Houston, TX) 2.74% 185 1,588 03/29/04
---------- --------
TOTAL 4,184 $ 28,251
========== ========
</TABLE>
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<TABLE>
<CAPTION>
LEASE
PERCENTAGE SQUARE ANNUAL TERMINATION
PARTNERSHIP TENANT/USER (LOCATION) OWNED FOOTAGE(1) RENT(1) DATE
- ----------- ----------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
FUND VII La Petite Academy (Houston, TX) 91.25% 6,178 $ 52,969 03/29/04
Whataburger (Dallas, TX) 54.88% 1,212 32,879 09/30/06
Superior Sound (Houston, TX) 27.28% 813 8,183 08/31/01
AFC, Inc./Church's (Houston, TX) 27.28% 813 4,092 05/14/00
Gannett/Billboard (Houston, TX) 27.28% 813 4,066 11/30/97
---------- ----------
TOTAL 9,830 102,189
========== ==========
FUND VIII Whataburger (Dallas, TX) 45.12% 996 $ 27,032 09/30/06
Superior Sound (Houston, TX) 72.72% 2,169 21,817 08/31/01
AFC, Inc./Church's (Houston, TX) 72.72% 2,169 10,908 05/14/00
Gannett/Billboard (Houston, TX) 72.72% 2,169 10,840 11/30/97
Discount Tire (Fort Worth, TX) 100% 4,147 44,400 06/01/05
La Petite Academy (Houston, TX) 100% 5,998 49,128 03/31/05
Goodyear Tire-Marsh Ln (Dallas, TX) 25.28% 1,472 16,080 05/31/05
---------- ----------
TOTAL 19,119 $ 180,205
========== ==========
AAA GDYR Goodyear Tire-Marsh Ln (Dallas, TX) 74.72% 4,352 $ 47,520 05/31/05
Goodyear Tire-Hillcrest (Dallas, TX) 100% 5,772 59,400 02/29/00
---------- ----------
TOTAL 10,124 $ 106,920
========== ==========
FUND IX Foodmaker-Jack/Box (Dallas, TX) 100% 2,238 68,998 01/30/03
Baptist Memorial Hospital 100% 15,000 187,500 08/31/07
(Memphis, TN)
Waldenbooks/Payless (Austin, TX) 100% 4,000 82,000 06/30/02
Golden Corral/I-45 (Houston, TX) 100% 12,000 182,994 11/29/07
Golden Corral/Hwy 1960 (Houston, TX) 4.80% 576 8,723 03/14/08
---------- ----------
TOTAL 33,814 $ 530,215
========== ==========
FUND X Golden Corral/Hwy 1960 95.20% 11,424 $ 172,965 03/14/08
(Houston, TX)
TGI Friday's (Houston, TX) 100% 8,500 180,500 01/31/03
Goodyear Tire (Houston, TX) 100% 5,209 51,756 03/31/03
Computer City (Minneapolis, MN) 100% 15,000 246,750 09/31/09
AFC, Inc./Popeye's (Atlanta, GA) 100% 2,583 95,867 07/19/14
Blockbuster Music (Independence, MO) 45.16% 6,774 77,010 04/30/04
Onecare (Sugarland, TX) 100% 15,000 157,200 01/30/05
Just for Feet (Tucson, AZ) 18.25% 2,801 69,526 09/30/16
---------- ----------
TOTAL 67,291 $1,051,574
========== ==========
</TABLE>
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<TABLE>
<CAPTION>
LEASE
PERCENTAGE SQUARE ANNUAL TERMINATION
PARTNERSHIP TENANT/USER (LOCATION) OWNED FOOTAGE(1) RENT(1) DATE
- ----------- ----------- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
FUND XI Blockbuster Video (Wichita, KS) 49% 6,860 $ 92,104 12/31/04
Blockbuster Video (Oklahoma City, OK) 100% 6,500 80,523 09/01/03
Just for Feet (Tucson, AZ) 29.85% 4,582 113,717 09/30/16
Bank United (The Woodlands, TX) 49% Land Lease 26,488 09/30/11
Just For Feet (Baton Rouge,LA) 49% 7,521 147,264 05/15/12
Hollywood Video (Lafayette, LA) 25.42% 1,904 34,243 02/31/12
Pier One (Longmont, CO) 100% 8,014 127,502 02/31/12
---------- --------
TOTAL 25,463 $621,841
========== ========
</TABLE>
(1) Reflects ownership percentages.
PARTNERSHIP DISTRIBUTIONS
The following table sets forth the distributions paid per Unit per
Partnership from the Partnerships' inception through March 31, 1998. Amounts
paid in the indicated quarter were determined based upon Partnership operations
during the preceding quarter. The original cost per Unit was $30,000 for each
of the Partnerships, except Fund GDYR, Fund IX, Fund X and Fund XI whose
original Units cost $1,000 each. All distributions were made from cash flow
from operations except as otherwise noted.
The tables below set forth information for each Partnership regarding its
cash distributions from inception through December 31, 1997.
CUMULATIVE CASH DISTRIBUTIONS SINCE FORMATION THROUGH 3/31/1998
<TABLE>
<CAPTION>
CUMULATIVE
YEAR OF DISTRIBUTIONS TOTAL DISTRIBUTIONS
PARTNERSHIP FIRST THROUGH AS PERCENT OF ORIGINAL
NAME INVESTMENT 3/31/1998 INVESTED CAPITAL
- ----------- ---------- ------------- ----------------------
<S> <C> <C> <C>
FUND III 1986 $1,061,972 112.4%
FUND IV 1986 437,214 71.09%
FUND V 1987 417,088 86.89%
FUND VI 1987 231,753 77.25%
FUND VII 1988 824,602 73.29%
FUND VIII 1990 1,252,756 67.35%
FUND GDYR 1990 769,027 57.61%
FUND IX 1990 2,677,023 49.66%
FUND X 1992 3,350,487 29.25%
FUND XI 1994 820,472 11.62%
</TABLE>
- ----------
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<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE
DISTRIBUTIONS DISTRIBUTIONS
ORIGINAL OF CASHFLOW IN RETURN OF ADJUSTED
PARTNERSHIP L.P. CAPITAL FROM OPERATIONS L.P. CAPITAL L.P. CAPITAL
- ----------- ------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
FUND III $ 945,000 $ 1,051,786 $ 10,186 $ 934,814
FUND IV 615,000 437,214 -0- 615,000
FUND V 480,000 397,477 19,611 460,389
FUND VI 300,000 226,486 5,267 294,733
FUND VII 1,125,100 824,602 -0- 1,125,100
FUND VIII 1,860,000 1,246,736 6,020 1,853,980
FUND GDYR 1,335,000 663,117 105,910 1,229,090
FUND IX 5,390,500 2,677,023 -0- 5,390,500
FUND X 11,453,610 3,350,487 -0- 11,453,610
FUND XI 7,061,209 820,472 -0- 7,061,209
----------- ----------- -------- -----------
Total $30,565,419 $11,695,400 $146,994 $30,418,425
</TABLE>
- ----------
MANAGEMENT OF THE PROPERTIES
Since their inception, each Partnership was administered and managed by
the Adviser, until its acquisition by AmREIT on June 5, 1998. After that
time, these functions have been continued under the same contractual terms by
AmREIT Operating Corporation and/or other affiliates of AmREIT.
EMPLOYEES
The partnerships do not employ their own personnel. The Partnerships'
business activities are conducted by AmREIT Operating Corporation and/or other
affiliates of AmREIT pursuant to management agreements. Under these
agreements, AmREIT Operating Corporation and/or other affiliates of AmREIT are
reimbursed by the Partnerships for the actual cost of the employees providing
services to the Partnerships.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES
The Partnerships and AmREIT are each vehicles recognized as appropriate
for the holding of real estate investments and afford passive investors, such
as Limited Partners and shareholders, certain benefits, including limited
liability, a professionally managed portfolio and the avoidance of double-level
taxation on distributed income. The information below highlights a number of
the significant differences between the Partnerships and AmREIT relating to,
among other things, form of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure,
compensation and fees, and investor rights, and compares certain of the
respective legal rights associated with the ownership
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<PAGE>
of Units and Shares. These comparisons are intended to assist Limited Partners
in understanding how their investments will be changed if, as a result of the
Merger, their Units are exchanged for Shares. In addition, there are
significant differences in the tax treatment of the Partnerships and REITs, and
some of the material tax differences are summarized below under the captions
"Taxation of Taxable Investors" and "Taxation of Tax-Exempt Investors." This
discussion is summary in nature and does not constitute a complete discussion
of these matters, and Limited Partners should carefully review the balance of
this Prospectus for additional discussions.
<TABLE>
<CAPTION>
===================================================================================================================
THE PARTNERSHIPS AMREIT
===================================================================================================================
<S> <C>
FORM OF ORGANIZATION
Each of the Partnerships is a limited AmREIT is a Maryland corporation formed
partnership organized under Nebraska or Texas law for the purpose of investing in real estate
formed for the purpose of investing, without the properties. As a corporation, AmREIT may remain
use of leverage, in a real estate portfolio in existence in perpetuity. AmREIT intends to
consisting of income producing retail real continue to qualify as a REIT for federal income
property under long-term net lease. Each tax purposes. Unlike the Partnerships, AmREIT
Partnership has been treated as a partnership for may, in the discretion of its Board of
federal income tax purposes. The Partnerships are Directors, use leverage to acquire its under the
control of their general partners. investments. AmREIT is governed by its
Directors.
LENGTH OF INVESTMENT
An investment in each of the Partnerships Unlike the Partnerships, AmREIT intends to
was presented to Limited Partners as a finite life continue its operations for an indefinite time
investment, with the Limited Partners to receive period and has no specific plans for disposition
regular cash distributions out of the of the assets acquired through the Merger or
Partnership's net operating income and special subsequent acquisitions. AmREIT intends to
distributions of net sale proceeds through the distribute at least 95% of its REIT taxable
liquidation of the Partnership's real estate income, but expects to retain net sale or
investments. Under each of the Partnership refinancing proceeds for new investments,
Agreements, the Partnership's stated term of capital expenditures, working capital reserves
existence was for a substantial period (from 30 to or other appropriate purposes. In contrast to
45 years from inception, depending upon the the Partnerships, AmREIT will constitute a
Partnership), but the general partners stated vehicle for taking advantage of future their
general intention of selling the investment opportunities that may be available
Partnership's properties within a period of 10 to in the real estate markets. See "THE MERGER --
12 years after acquisition or development of the Background of and Reasons for Merger."
properties. Limited Partners were advised that
sale of the Partnership's assets would, however,
be dependent upon market conditions and as such,
might vary from time to time.
</TABLE>
Limited Partners in each of the Partnerships expect liquidation of their
investment when the assets of the Partnership are liquidated. In contrast,
AmREIT does not expect to dispose of its investments within any prescribed
periods and, in any event, plans to retain the net sale proceeds for future
investments unless
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<PAGE>
distributions are required to retain REIT status. Shareholders are expected to
achieve liquidity for their investments by trading the Shares in the market
should one develop after the Merger, and not through the liquidation of
AmREIT's assets. The Shares may ultimately trade, when and if a public market
for the shares is established, at a discount from, or premium to, their pro
rata interest in the liquidation value of AmREIT's properties.
<TABLE>
<S> <C>
PROPERTIES AND DIVERSIFICATION
The investment portfolio of each of the As a result of the Merger, AmREIT will
Partnerships is limited to the assets acquired acquire substantially all of the properties of
with the initial equity raised from the General the Participating Partnerships. In addition,
and Limited Partners. The Partnerships may not AmREIT may issue debt and/or equity securities
use debt financing to acquire investments. in the future, and retain all, or substantially
all, of the net liquidation proceeds from the
sale of AmREIT's assets to finance expansion of
AmREIT's investment portfolio.
</TABLE>
Through the Merger, AmREIT's current portfolio and additional investments
that may be made from time to time, AmREIT will have an investment portfolio
substantially larger and more diversified than the portfolio of any of the
Partnerships. An investment in AmREIT is subject to the risks normally
attendant to ongoing real estate ownership and, if AmREIT develops property, to
the risks related to property development.
<TABLE>
<S> <C>
PERMITTED INVESTMENTS
Each of the Partnerships was generally Under its Bylaws, AmREIT may purchase for
authorized to invest only in income-producing investment, lease, manage, sell, develop,
single tenant retail properties. The Partnerships subdivide and improve a wider range of retail
have concentrated their investment in single real property and interests therein, including
tenant retail buildings. In general, the mortgage loans secured thereby. See "AMREIT AND
Partnerships are not permitted to invest in ITS BUSINESS."
mortgage loans.
Like the Partnerships, AmREIT has
concentrated its investments in single tenant
retail properties. AmREIT's Bylaws, however,
authorizes it to make other real estate
investments. Consequently, after the Merger,
AmREIT's investments will be more diversified
than the investments of the Partnerships. Such
diversification, if it occurs, may serve as a
hedge against the risk of having all of AmREIT's
investments limited to a single asset group but
will also expose AmREIT to the risk of owning
and operating assets not directly related to its
primary property type.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
ADDITIONAL EQUITY
The Partnerships are authorized to issue only AmREIT may, in the discretion of its Directors,
their respective Units. None of the Partnerships issue additional equity securities consisting of
is authorized to issue additional equity Common Shares or Preferred Shares, provided that
securities. the total number of Shares issued does not
exceed the authorized number of Shares or
Preferred Shares set forth in its Charter.
AmREIT expects to raise additional equity from
time to time to increase its available capital
for investment.
Unlike the Partnerships, AmREIT has substantial
flexibility to raise equity, through the sale of
Shares or Preferred Shares, to finance its
business and affairs. AmREIT, through the
issuance of new equity securities, may
substantially expand its capital base to make
new real estate investments.
</TABLE>
An investment in AmREIT should not be viewed as an investment in a
specified pool of assets, but instead as an investment in an ongoing real
estate investment business, subject to the risks associated with a real estate
portfolio that is expected to change from time to time. The issuance of
additional equity securities by AmREIT will dilute the interests of
shareholders if sold at prices below their fair market value.
<TABLE>
<S> <C>
BORROWING POLICIES
None of the Partnerships were authorized to AmREIT is permitted to borrow, on a
borrow funds for the acquisition of their secured or unsecured basis, funds to finance
portfolio. its business.
</TABLE>
In conducting its business, AmREIT may borrow funds to the extent
believed appropriate. It is expected that AmREIT will be more leveraged than
the Partnerships, some of which have not incurred significant borrowings in
comparison to the overall value of their assets. Borrowing funds may allow
AmREIT to substantially expand its asset base, but likewise will increase
AmREIT's risks due to its leveraged investments.
<TABLE>
<S> <C>
RESTRICTIONS UPON RELATED PARTY TRANSACTIONS
In varying degrees, each of the Partnership Maryland law allows AmREIT to engage in
Agreements restricts the applicable Partnership transactions with Directors, or other persons a
from entering into a variety of business Director is directly or indirectly interested in
transactions with the general partners and their or connected with, as a trustee, partner, trust
Affiliates. Since each of the Partnership manager, shareholder, member, employee, officer
Agreements may be amended by a majority vote of or agent of such other persons. Its Bylaws
Limited Partners, it is possible to amend the prohibit AmREIT from entering into a
Partnership Agreement to authorize any transaction transaction with any of the interested parties
with the general partners and affiliates. unless the terms and conditions of such
transaction have been disclosed to AmREIT
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Directors and approved by a majority of
Directors not otherwise interested in the matter
(including a majority of independent Directors)
or has been disclosed in reasonable detail to
the shareholders, and approved by holders of a
majority of Shares then outstanding or entitled
to vote thereon.
Except for transactions specifically Maryland law allows AmREIT to enter into
approved in the Partnership Agreements, the transactions with interested parties, such as
Partnerships are, to varying degrees, not Directors, officers, significant shareholders
authorized to enter into transactions with the and Affiliates thereof, but such transactions
general partners and their affiliates without must be approved by a majority of AmREIT
Limited Partner approval. Directors not interested in the matter provided
that they have determined the transaction to be
fair, competitive and commercially reasonable.
Since neither the Bylaws nor the Charter require
the approval of shareholders for entering into
transactions with interested parties, it may be
easier for AmREIT to enter into such
transactions than it would be for the
Partnerships, where Limited Partner approval
for such transactions is mandated.
MANAGEMENT CONTROL AND RESPONSIBILITY
Under each of the Partnership Agreements, The Board of Directors will have exclusive
the general partners are, subject to certain control over AmREIT's business and affairs
narrow limitations, vested with all management subject only to the restrictions in its Charger
authority to conduct the business of the and the Bylaws. Shareholders have the right to
Partnership, including authority and elect members of the Board of Directors. AmREIT
responsibility for overseeing all executive, Directors are required to act in good faith and
supervisory and administrative services rendered exercise care in conducting AmREIT's affairs.
to the Partnership. The general partners have the See "FIDUCIARY RESPONSIBILITY -- Directors and
right to continue to serve in such capacities Officers of AmREIT."
unless removed by a majority vote of Limited
Partners. Limited Partners have no right to
participate in the management and control of the
Partnership and have no voice in its affairs
except for certain limited matters that must be
submitted to a vote of the Limited Partners under
the terms of the Partnership Agreements or as
required by law. See "VOTING RIGHTS" below. The
general partners are accountable as fiduciaries to
the Partnerships and are required to exercise good
faith and integrity in their dealings in
conducting the Partnership's affairs. See
"FIDUCIARY RESPONSIBILITY -- general partners of
the Partnerships."
</TABLE>
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<PAGE>
Shareholders will have greater control over management of AmREIT than the
Limited Partners have over the Partnerships because AmREIT Board is elected by
the Shareholders. The general partners do not need to seek re-election
annually, but instead serve unless removed by an affirmative vote of the
Limited Partners, which is generally regarded as an extraordinary event only
appropriate in cases of mismanagement and changes in control due to shifts in
the ownership of Units.
<TABLE>
<S> <C>
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of state law, the general AmREIT's Charter and Maryland state law
partners have liability for the payment of provide broad indemnification rights to
Partnership obligations and debts unless Directors and officers who act in good faith,
limitations upon such liability are expressly and in a manner reasonably believed to be in or
stated in the obligation. Each of the Partnership not opposed to the best interests of AmREIT and,
Agreements provides generally that neither general with respect to criminal actions or proceedings,
partners nor any of their affiliates performing without reasonable cause to believe their
services on behalf of the Partnership will be conduct was unlawful. In addition, the Charter
liable to the Partnership or its Limited Partners indemnifies Directors and officers against for
any act or omission performed in good faith amounts paid in settlement, authorizes AmREIT to
pursuant to authority granted by the Partnership advance expenses incurred in defense upon
Agreement, and in a manner reasonably believed to AmREIT's receipt of an appropriate undertaking
be within the scope of the authority granted and to repay such amounts if appropriate, and in
the best interest of the Partnerships, provided authorizes AmREIT to carry insurance for the
that such act or omission did not constitute benefit of its offices and trust managers even
fraud, misconduct, bad faith or negligence. In for matters as to which such persons are not
addition, the Partnership Agreements indemnify the entitled to indemnification. See "FIDUCIARY
general partners and their affiliates for RESPONSIBILITY." Through the Merger, AmREIT will
liability, loss, damage, cost and expenses, be assuming all existing and contingent
including attorneys' fees, incurred by them in liabilities of the Participating Partnerships,
conducting the Partnerships' business, except in including their obligations to indemnify the
events such as fraud, misconduct, bad faith or general partners and others for litigation
negligence. To varying degrees, the general expenses that might be incurred by them for
partners of each of the Partnerships have limited serving as general partners of the Partnerships
liability to the Partnership for acts of omissions or for sponsoring the Merger. Although the
undertaken by them when performed in good faith, standards are expressed somewhat differently,
in a manner reasonably believed to be within the there are limitations similar to those on the
scope of their authority and in the best interests general partners of the Partnerships upon the
of the Partnership. The general partners also liability and indemnification of the Directors
have, under specified circumstances, a right to be and officers of AmREIT.
reimbursed for liability, loss, damage, costs and
expenses incurred by them by virtue of serving as
general partners.
</TABLE>
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AmREIT believes that the scope of the liability and indemnification
provisions in AmREIT's governing documents provides protection against claims
for personal liability against AmREIT's Directors and officers which is
comparable to, though not identical with, the protections afforded to the
general partners and their affiliates under the Partnership Agreements. Through
the Merger, AmREIT will be assuming all of the existing and contingent
liabilities of the Participating Partnerships, including their obligations to
indemnify the general partners and other persons.
<TABLE>
<S> <C>
ANTI-TAKEOVER PROVISIONS
Changes in management can be effected only The Charter and Bylaws contain a number of
by removal of the general partners, which action provisions that might have the effect of
requires a majority vote of Limited Partners. Due entrenching current management and delaying or
to transfer restrictions in the Partnership discouraging a hostile takeover of AmREIT. These
Agreements, the general partners may restrict provisions include, among others, the following:
transfers of the Units and, in particular, affect
whether the transferees have voting rights. Of (a) the power of AmREIT's Directors to
particular significance is that an assignee of a issue 10,000,000 Preferred Shares, with such
Unit may not become a substitute Limited Partner, rights and preferences as determined by AmREIT
entitling him to vote on matters that may be Directors;
submitted to the Limited Partners for approval,
unless such substitution is consented to by the (b) the power of AmREIT's Directors to
general partners, which consent, in the general stop transfers and/or redeem Shares under the
partners' absolute discretion, may be withheld. following conditions: from any shareholder who
The general partners may exercise this right of owns, directly or indirectly, 9.8% or more of
approval to deter, delay or hamper attempts by the outstanding Shares, from any five or fewer
persons to acquire a majority interest of the shareholders who own, directly or indirectly,
Limited Partners. more than 50% of the outstanding Shares, or from
any other Shareholder if AmREIT's Directors
otherwise determine in good faith that ownership
of the outstanding Shares has or may become
concentrated to an extent that may prevent
AmREIT from qualifying as a REIT under the Code.
Any Shares transferred in violation of this
restriction become "Excess Shares," with no
voting or distribution rights. AmREIT has the
power to purchase or direct the sale of such
Excess Shares, with the sale proceeds being paid
to the former owner;
Directors remain in office unless
removed by the shareholders or if another
nominee for Director receives the vote of a
majority of the outstanding Shares. Directors
remain on the Board regardless of whether they
receive a vote of the majority of the
outstanding Shares at AmREIT's annual meeting;
and
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(d) the requirement that, except in
certain circumstances, certain "business
combinations" (as defined therein) between
AmREIT and a "related person" (as also defined
therein, generally a person or entity which owns
more than 50% of the outstanding shares of
AmREIT) be approved by the affirmative vote of
the holders of 80% of the outstanding Shares and
Preferred Shares, including the vote of the
holders of not less than 50% of the Shares and
Preferred Shares not owned by the related
person. The Charter is designed to prevent
a purchaser from utilizing two-tier pricing and
similar tactics in an attempted takeover of
AmREIT, and it may have the overall effect of
making it more difficult to acquire and exercise
control of AmREIT. In very general terms, the
fair price provision requires that unless a
potential purchaser were willing to purchase 80%
of the outstanding shares of AmREIT as the first
step in a business combination (or unless a
potential purchaser were assured of obtaining
the affirmative votes of at least 80% of
AmREIT's outstanding shares), the purchaser
would be required either to negotiate with
AmREIT Directors and offer terms acceptable to
them or to abandon the proposed business
combination. The Charter may provide AmREIT
Directors with enhanced ability to
block any proposed acquisition of AmREIT and to
retain their positions in the event of a
takeover bid and may require a related person to
pay a higher price for shares or structure his,
her or its transaction differently than would be
the case in the absence of the Fair Price
provision.
Although it may, under certain circumstances,
have the effect of discouraging unilateral
tender offers or other takeover proposals and
enhance the ability of AmREIT Directors to
retain their positions in the event of a
takeover bid, the business combination provision
in the Charter assures, to some degree, fair
treatment of all shareholders in the event of a
two-step takeover attempt.
</TABLE>
Certain provisions of the governing documents of the Partnerships and
AmREIT could be used to deter attempts to obtain control of the Partnerships
and AmREIT in transactions not approved by the general partners and AmREIT
Directors, respectively. When and if the Shares are traded on a national
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<PAGE>
securities system there will be a greater likelihood of changes in control in
the case of AmREIT, notwithstanding those provisions that might be employed by
the AmREIT Board to resist efforts to change control.
<TABLE>
<S> <C>
VOTING RIGHTS
Limited Partners by a majority vote may, Shareholders are entitled to elect the
without the concurrence of the general partners, AmREIT Board at each annual meeting. However,
amend the Partnership Agreement, dissolve the Directors remain in office even if they do not
Partnership, remove and/or elect a general receive the vote of the holders of a majority of
partner, and approve or disapprove the sale of all the outstanding Shares unless another nominee
or substantially all of the Partnership's assets. for his seat receives such a vote.
Limited Partners may not exercise these rights in
any way to extend the term of the Partnership, The Charter grants Shareholders the non-
change the Partnership to a general partnership, exclusive right, with approval of the Directors,
change the limited liability to the Limited to amend the Charter or without Board approval,
Partners or affect the status of the Partnership to amend the Bylaws, dissolve AmREIT, vote to
for federal income tax purposes. Furthermore, the remove members of the Board of Directors, and
Partnerships cannot change the allocations of approve or disapprove the sale of substantially
income, losses and cash distributions or the all of AmREIT's assets. In addition, certain
powers, rights and duties of the general partners other actions may not be taken by the Directors
without the consent of the general partners. without the approval of Shareholders, such as,
in general, any merger or consolidation of
AmREIT with or into a corporation, limited
partnership, limited liability company or
participation in a share exchange transaction;
or any business combination,
as defined, with an interested stockholder, as
defined. The Charter requires any such actions
to be approved by a Majority Vote of the
Shareholders.
</TABLE>
Shareholders have broader voting rights (i.e., the right to elect AmREIT
Directors at each annual meeting) than those currently afforded to Limited
Partners.
<TABLE>
<S> <C>
LIMITED LIABILITY OF INVESTORS
Under each of the Partnership Agreements and Under Maryland law, shareholders will not
applicable state law, the liability of Limited be liable for AmREIT's debts or obligations.
Partners for the Partnership's debts and The Shares, upon issuance, will be fully paid
obligations is generally limited to the amount of and nonassessable.
their investment in the Partnership, together with
an interest in undistributed income, if any. The
Units are fully paid and nonassessable.
</TABLE>
The limitation on personal liability of Shareholders is substantially the
same as that of Limited Partners in the Partnerships.
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<PAGE>
REVIEW OF INVESTOR LISTS
<TABLE>
<S> <C>
Generally speaking, Limited Partners of each A Shareholder is entitled, upon written
of the Partnerships are entitled to request copies demand, to inspect and copy the share records of
of investor lists showing the names and addresses AmREIT, at any time during usual business hours,
of all General and Limited Partners. The right to for a purpose reasonably related to his interest
receive such investor lists may be conditioned as a Shareholder.
upon the Limited Partners' payment of the cost of
duplication and a showing that the request is for
a reasonable purpose. Reasonable requests would
include requests for investor lists for the
purpose of opposing the Merger.
</TABLE>
The right of Shareholders to review investor lists is substantially the
same as the right afforded Limited Partners.
<TABLE>
<S> <C>
TAXATION OF TAXABLE INVESTORS
Income or loss earned by each of the If AmREIT qualifies as a REIT (and AmREIT
Partnerships, is not taxed at the partnership intends to conduct its business to so qualify),
level. Limited Partners are required to report AmREIT generally is permitted to deduct
their allocable share of Partnership income and distributions to its Shareholders, which
loss on their respective tax returns. Income and effectively reduces or eliminates the "double
loss from a Partnership generally constitute taxation" (at the corporate and Shareholder
"passive" income and loss, which can generally levels) that typically results when a
offset "passive" income and loss from other corporation earns income and distributes that
investments. Due to depreciation and other noncash income to Shareholders in the form of dividends.
items, cash distributions are not generally Shareholders will only recognize income on
equivalent to the income and loss allocated to amounts actually distributed by AmREIT.
Limited Partners. During operations, such cash Dividends received by Shareholders from AmREIT
distributions are partially sheltered but, if the generally will constitute portfolio income;
properties retain their value or appreciate, gain which cannot offset "passive" income and loss
upon liquidation of the asset will exceed the cash from other investments. Losses and credits
distributions available to Limited Partners. After generated within AmREIT, however, do not pass
the end of each fiscal year, Limited Partners through to the Shareholders. Because the amount
receive annual Schedule K-1 forms showing their of distributions required to be made by the
allocable share of Partnership income and loss for Company for purposes of maintaining its REIT
inclusion on their federal income tax returns. characterization is determined based on a
percentage of taxable income
(calculated with depreciation deductions,
excluding any net capital gains and prior to
payment of any dividends) the amount of
distributions required to be made by AmREIT may
be less than the distributions made by the
Partnerships. After the end of the Company's
calendar year, Shareholders should receive a
Form 1099-DIV used by corporations to report
their dividend income.
</TABLE>
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<PAGE>
Each of the Partnerships is a pass-through entity, whose income and loss
is not taxed at the entity level but instead allocated directly to the general
partners and Limited Partners. Limited Partners are taxed on income or loss
allocated to them, whether or not cash distributions are made to the Limited
Partners. In contrast, AmREIT intends to qualify as a REIT, allowing it to
deduct dividends paid to its Shareholders. To the extent AmREIT has net income
(after taking into account the dividends paid deduction), such income will be
taxed at AmREIT's level at the standard corporate tax rates. Dividends paid to
Shareholders will constitute portfolio income and not passive income.
<TABLE>
<S> <C>
TAXATION OF TAX-EXEMPT INVESTORS
Income or loss earned by each of the The IRS has ruled that income attributable
Partnerships is generally treated as UBTI unless to an investment in a REIT will not constitute
the type of income generated by the Partnership UBTI to certain tax-exempt investors as long as
would constitute qualified rental income or other such investor does not hold its shares subject
specifically excluded types of income. For to acquisition indebtedness. Accordingly,
Partnership income to be characterized as rental dividends received from AmREIT by tax-exempt
income, the Partnership could not provide services Shareholders should not constitute UBTI if such
to tenants that are considered other than those Shareholders did not finance the acquisition of
usually or customarily rendered in connection with their Shares.
the rental of rooms for occupancy only. Because of The amount of dividends paid to tax-exempt
the inherently factual nature of this issue, it is Shareholders may be less than the distributions
uncertain whether the income received by the made to such entities from their respective
Partnerships in connection with the leasing of its Partnership because of the REIT requirement that
Properties constitutes rental income for these distributions be based on a percentage of REIT
UBTI purposes. Accordingly, there is risk that the taxable income.
Partnership's income could be treated as UBTI for
tax-exempt Limited Partners.
A tax-exempt entity is treated as owning and
carrying on the business activity conducted by a
partnership in which such entity owns an interest.
Accordingly, to the extent a tax-exempt Limited
Partner owns an interest in a Partnership, the
income received by such Partnership must not
constitute UBTI in order for the tax-exempt
Limited Partner to avoid taxation.
DISTRIBUTION POLICIES
The Partnership Agreement of each None of AmREIT's governing documents
mandate
Partnership requires that net cash from operations the payment of distributions to Shareholders.
must be distributed quarterly to partners. Distributions by AmREIT will be determined by
Further, each Partnership Agreement would require AmREIT Directors and will be dependent upon a
that net proceeds obtained from the sale or number of factors, including the federal income
refinancing of properties be distributed to tax requirement that a REIT must distribute
partners, rather than being retained by the annually at least 95% of its
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
applicable Partnership for reinvestment or working taxable income. Although AmREIT has not made
capital. See "MARKET PRICES AND DISTRIBUTIONS -- distributions to Shareholders for some time, it
Partnership Distributions" for a more detailed intends to make regular quarterly distributions
history of the distributions paid by the in the future when it has sufficient cash from
Partnerships to their respective partners. operations. See "MARKET PRICES AND DISTRIBUTIONS
-- Distribution"
for a more detailed discussion of AmREIT's
distribution history. It is the policy of AmREIT
to retain proceeds from the sale, financing or
refinancing of properties for reinvestment in
new properties or for working capital purposes.
</TABLE>
Limited Partners participating in the Merger will experience substantial
differences in the payment of distributions as Shareholders of AmREIT in
comparison to owning Units in the Partnerships. Rather than owning equity
interests in an entity whose governing instruments require the distribution of
net cash from operations and the net proceeds or refinancing of properties,
they will own Shares in an entity whose governing documents do not require
distributions under similar circumstances, with the payment of such
distribution being subject to the discretion of AmREIT's Board of Directors.
Further, unlike the Partnerships, which must distribute net proceeds from the
sale or refinancing of properties, AmREIT currently does not intend to
distribute the net proceeds resulting from the sale or refinancing of
properties, but rather to use such proceeds to acquire additional properties or
for working capital purposes. See "RISK FACTORS -- Potential Changes in
Distribution Levels for Limited Partners."
<TABLE>
<S> <C>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
The Partnerships pay or may be required to The right to compensation for services
pay the following compensation to the General performed as an employee of AmREIT. See "AMREIT
Partner or his Affiliates: AND ITS BUSINESS -- Executive Compensation."
Property management fees of up to 3% of Distributions with respect to AmREIT
revenues per annum. shares owned by the General Partner or his
Management and administrative reimbursements Affiliates (including shares received in
which have historically equaled 3% to 6% of the Merger) on the same basis as the other
rental revenues per annum. shareholders.
Acquisition Fees and Expenses upon the
acquisition of properties not to exceed 6.5%
of the contract price of the property.
Leasing fees at competitive rates if and
when properties are leased or released.
Disposition fee of 3% of the disposition
price of the property or, if less, one-half
of the Competitive Real Estate Commission,
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
the payment of which, except in the case of
Fund XII, Fund VIII and Fund Gdyr, is
conditioned upon Limited Partners first
receiving a specified minimum cumulative
return, which condition will not be
satisfied for any Partnerships by the
Merger.
A promotional interest from 10% to 25% of
the net proceeds from the sale of
Partnership property, the payment of which,
in the case of each Partnership, is
conditioned upon the Limited Partners first
receiving a specified minimum cumulative
return, which condition will not be
satisfied for any Partnership by the Merger.
The right to receive distributions equal to
1% of cashflow from operations and 1% of net
proceeds from the sale or disposition of
Partnership property, the payment of which
with respect to net proceeds from the sale
of property is (except in Fund III, Fund IV,
Fund V and Fund VI), conditioned upon the
Limited Partners first receiving a specified
minimum cumulative return, which condition
will not be satisfied for any Partnership by
the Merger.
</TABLE>
The foregoing is intended to provide Limited Partners with a comparison
of the compensation, fees and distributions currently payable by the
Partnerships to the General Partner and AmREIT and the compensation payable by
AmREIT to the General Partner and his Affiliates after the Merger. If the
Merger is consummated, the General Partner and his Affiliates will receive
distributions on Shares they receive in exchange for their General Partner
interests (in the case of Fund III, Fund IV, Fund V and Fund VI) and in lieu of
cash disposition compensation (in the case of Fund VII, Fund VIII and Fund IX).
The General Partner believes that any conflicts that may have arisen
between his interests and those of his Affiliates and the interests of the
Limited Partners in connection with the Merger in regard to the compensation
and fees the general partners, and payable to him by AmREIT after the Merger
are insignificant because such compensation in connection with the management,
administration and operation of the Partnerships is currently payable to AmREIT
or its Affiliates. Moreover, the General Partner's interest in Partnership
cashflow from operations and property dispositions, which will be lost in the
Merger, is a negative factor of the Merger from the General Partner's
standpoint.
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<PAGE>
COMPARISON OF UNITS, SHARES AND NOTES
The following compares certain of the investment attributes and legal
status rights associated with the ownership of Units, the Shares comprising the
Units and Notes.
LEGAL RIGHTS
<TABLE>
<CAPTION>
================================================================================================================
UNITS SHARES NOTES
================================================================================================================
<S> <C> <C>
The Units of each Partnership The Shares constitute equity The Notes will be unsecured debt
constitute equity interests interest in AmREIT. Each obligations of AmREIT, issued
entitling each Limited Partner to Shareholder will be entitled to pursuant to the Loan Agreement.
his pro rata share of cash his pro rata share of the The Notes will bear interest at a
distributions. Each of the dividends made with respect to the fixed rate of 6.0% per annum and
Partnership Agreements specifies Common Stock. The dividends will mature approximately seven
how the cash available for payable to the Shareholders are years after the Closing Date.
distribution, whether arising from not fixed in amount and are only Prior to maturity, quarterly
operations, sales or refinancings, paid if, as and when declared by installments of accrued interest
is to be shared among the General AmREIT's Board of Directors. will be paid to Noteholders on
Partner and Limited Partners. The AmREIT's Board of Directors the first day of each January,
distributions payable to the adopted a policy of reinvesting April, July and October,
Limited Partners are not fixed in available cash flow and does not continuing until the entire
amount and depend upon the intend to pay dividends with interest and principal of each
operating results and net sale or respect to the Shares. Note is paid in full. The unpaid
refinancing proceeds available principal balance and all accrued
from the disposition of the but unpaid interest shall be paid
Partnership's assets. to Noteholders upon the date of
maturity of the Notes. AmREIT
reserves the right to redeem the
Notes at any time, in whole or in
part, without a premium. A
failure to make principal and
(subject to a 30-day grace
period) interest payments when
due constitutes an event of
default under the Notes, allowing
the Noteholders of more than 50%
in principal amount of the Notes
then outstanding to declare the
outstanding principal amount of
the Notes, plus accrued but
unpaid interest, to be
immediately due and payable.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Both the Units and Shares represent equity interests entitling the
holders thereof to participate in the earnings of the Partnerships and AmREIT,
respectively. Distributions and dividends payable with respect to the Units
and Shares depend upon the performance of the Partnerships and AmREIT,
respectively. In
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<PAGE>
contrast, the Notes constitute unsecured debt obligations providing for
variable payments of interest and a lump sum payment at maturity.
ISSUANCE OF ADDITIONAL SECURITIES
<TABLE>
<CAPTION>
================================================================================================================
UNITS SHARES NOTES
================================================================================================================
<S> <C> <C>
Since the Partnerships are not The Board of Directors may, in Since the Notes are debt
authorized to issue additional its discretion, issue additional obligations of AmREIT, their
equity securities, there can be no shares of Common Stock or payment has priority over
dilution of the distributive share Preferred Stock with such powers, dividends or distributions
of the Limited Partners of cash preferences and rights as the payable to the Shareholders or
available for distribution. Board of Directors may at the holders of Preferred Stock. As
time designate. The issuance of unsecured obligations of AmREIT,
additional shares of Common Stock the Notes have no priority over
or Preferred Stock, beyond the other unsubordinated and
Shares to be issued in the unsecured AmREIT debt as to the
Merger, may result in the net liquidation proceeds of any
dilution of the interests of the of AmREIT's assets. There are no
Shareholders. In addition, restrictions upon AmREIT's
Shares of Preferred Stock could authority to grant mortgages,
be issued with powers, liens or other security interests
preferences and rights adversely in AmREIT's real and personal
affecting the holders of Common property contained in the Notes;
Stock. and such security interests, if
granted, would permit the holders
thereof to have a priority claim
against such collateral in the
event the secured obligations
were in default, or upon the
bankruptcy or insolvency of
AmREIT.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Units are not subject to dilution, since the Partnerships are not
authorized to issue additional equity securities. AmREIT may issue additional
shares of Common Stock and shares of Preferred Stock with priorities or
preferences with respect to dividends and liquidation proceeds. Payment of the
Notes will have priority over distributions to the Shares of any class of
equity securities that might be issued by AmREIT. Since the Notes are,
however, unsecured obligations, any senior secured obligations issued by AmREIT
would have prior claims against the collateral given for security in the event
AmREIT defaults in the payments of those secured obligations, or upon the
bankruptcy or insolvency of AmREIT.
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<PAGE>
LIQUIDITY
<TABLE>
<CAPTION>
================================================================================================================
UNITS SHARES NOTES
================================================================================================================
<S> <C> <C>
The transfer of the Units is The Shares will be freely The Notes will be freely
subject to a number of transferable. AmREIT does not transferable. AmREIT will not
restrictions imposed by the intend to apply to list the Shares seek to list the Notes on a
Partnership Agreements, which are immediately upon consummation of national securities exchange.
designed primarily to preserve the the Merger. There is no assurance There will not be a regular
tax status of the Partnership as a as to when and if AmREIT will list secondary market for the Notes.
"partnership" under the Code. No the Common Shares on any other See "THE MERGER - Background on
transferee of a Unit has the right national exchange or be able to The Merger."
to become a substitute Limited establish a secondary market for
Partner (entitling such person to the Common Shares. Moreover, the
vote on matters submitted to a breadth and strength of this
vote of the Limited Partners) market will depend upon, among
unless, among other things, such other things, the number of Shares
substitution is approved by the outstanding, AmREIT's financial
General Partner. In view of the results and prospects, the general
foregoing, no secondary market for investment interest in companies
the Units is available. See "THE like AmREIT and the relative
MERGER - Background on The attractiveness of AmREIT's yields
Merger." compared to those of alternative
investments. See "THE MERGER -
Background on The Merger."
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
One of the primary objectives of the Merger is to provide increased
liquidity to the Limited Partners. The Shares, while freely transferable, will
not initially be listed on a national securities exchange. The breadth of this
market cannot yet be determined. There will be no market for the Notes. There
is no secondary market for the Units.
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<PAGE>
TAXATION OF TAXABLE INVESTORS
<TABLE>
<CAPTION>
================================================================================================================
UNITS SHARES NOTES
================================================================================================================
<S> <C> <C>
Income or loss earned by each As a corporation, AmREIT is not Interest payments made on the
Partnership is not taxed at the permitted to deduct distributions Notes will constitute portfolio
Partnership level. Limited (dividends) to its Shareholders, income, which cannot offset
Partners must report their which effectively equals "double passive loss from other
allocable share of Partnership taxation" (at the corporate and investments. After the end of
income and loss on their shareholder levels) of income it each fiscal year, Noteholders
respective tax returns. earns and distributes to its will receive from AmREIT IRS Form
Partnership income and loss Shareholders in the form of 1099-INT to show the Noteholders
generally constitute "passive" dividends. Shareholders would interest payments during the
income and loss, which can recognize income on any amount prior calendar year. See
generally offset passive income actually distributed by AmREIT. "MATERIAL FEDERAL INCOME TAX
and loss from other investments. Any dividends received by ASPECTS."
For a definition of "passive" Shareholders from AmREIT generally
income and loss, see "Material will constitute portfolio income,
Federal Income Tax Aspects." Due which cannot offset passive income
to depreciation and other noncash and loss from other investments.
items, cash distributions are not Losses and credits generated
generally equivalent to the income within AmREIT do not pass through
and loss allocated to Limited the Shareholders. After the end
Partners. During operations, such of AmREIT's calendar year,
cash distributions to Limited Shareholders will receive IRS Form
Partners may be partially 1099-DIV used by corporations to
sheltered from taxes, but tax on report any dividend income. See
future gain resulting from the "MATERIAL FEDERAL INCOME TAX
disposition of property will ASPECTS."
offset any taxes previously
sheltered. After the end of each
fiscal year, Limited Partners
receive annual Schedule K-1 forms
showing their allocable share of
Partnership income and loss for
inclusion on their federal income
tax returns.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
TAXATION OF DISTRIBUTIONS/DIVIDENDS
Each of the Partnerships is a pass-through entity, whose income and loss
are not taxed at the entity level but instead are allocated directly to the
Partners. Limited Partners are taxed on income or loss allocated to them,
whether or not cash distributions are made to the Limited Partners. In
contrast, AmREIT, as a corporation, is not allowed to deduct dividends paid to
its Shareholders. To the extent AmREIT has net income, such income will be
taxed at the standard corporate tax rates. Any dividends paid to Shareholders
would constitute portfolio income and not passive income. Noteholders will
recognize portfolio income on the interest payments received on the Notes.
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<PAGE>
TAXATION OF TAX-EXEMPT INVESTORS
<TABLE>
<CAPTION>
================================================================================================================
UNITS SHARES NOTES
================================================================================================================
<S> <C> <C>
Income or loss earned by each of Dividends received from AmREIT by Interest income received by
the Partnerships is generally Tax-Exempt Shareholders should not certain tax-exempt investors
treated as UBTI. constitute UBTI if such receiving Notes in the Merger
Shareholders are not dealers and will not be characterized as UBTI
did not debt-finance the so long as the tax-exempt
acquisition of their Shares. See investor does not hold its Notes
"MATERIAL FEDERAL INCOME TAX as a dealer under Code Section
ASPECTS." 512(b)(5)(B) or subject to
acquisition indebtedness. See
"MATERIAL FEDERAL INCOME TAX
ASPECTS."
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest.
Accordingly, to the extent a Tax-Exempt Limited Partner owns an interest in a
Partnership, the income received by such Partnership would constitute UBTI and
would generally be taxable to the Tax- Exempt Limited Partner. Income
attributable to the Shares is not UBTI, subject to the conditions discussed
above. Similarly, interest income and principal payments treated as taxable
income received under the Notes are not UBTI, subject to the conditions
discussed above.
CONSENT PROCEDURES
AMREIT CONSENT PROCEDURES
TABULATION OF AMREIT CONSENTS. Shareholders of record, as of the close
of business on the Record Date, are entitled to submit their vote on the Merger
by timely submitting their AmREIT Consent. AmREIT Consents submitted by the
Shareholders will be received, tabulated and certified as to time of delivery
and vote by the Transfer Agent, The Bank of New York.
AMREIT CONSENT SOLICITATION PERIODS. This Prospectus, together with the
Letter of Instructions, AmREIT Consent and any other solicitation materials
which may be distributed to Shareholders by AmREIT, constitute the Solicitation
Materials distributed to the Shareholders to obtain their votes (consents) for
AmREIT's participation in the Merger. The AmREIT Solicitation Period is the
time frame during which the Shareholders may vote for or against the Merger.
The AmREIT Solicitation Period will commence upon mailing of the
Solicitation Materials (of which the Prospectus is a part) to the Shareholders
(which mailing is expected to be on or about _____________, 1998) and will
continue, unless sooner terminated, to the later of (a) ______________, 1998 or
(b) such later date as may be selected by AmREIT (the "AmREIT Solicitation
Period Expiration Date"). At its discretion, AmREIT may elect to extend the
AmREIT Solicitation Period from time to time. Any Consents delivered to the
Transfer Agent prior to 5:00 p.m. New York Standard Time, on the AmREIT
Solicitation Period Expiration Date will be effective, provided that such
AmREIT Consents have been properly completed, signed and delivered.
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<PAGE>
Before the AmREIT Solicitation Expiration Date, the Transfer Agent will
give notice to AmREIT at such time, if any, it receives Consents voting in
favor of the Merger from shareholders holding a majority of the Shares eligible
to vote on the Merger. Thereafter, subject to prior revocation or
disqualification, AmREIT may, in its sole discretion, terminate the AmREIT
Solicitation Period.
AmREIT has not scheduled a special meeting of the Shareholders to discuss
the Solicitation Materials or the terms of the Merger. Management intends to
actively solicit the support of the Shareholders for the Merger and may,
subject to applicable federal and state securities laws, hold informal meetings
with individual or groups of Shareholders, answer questions about the Merger
and the Solicitation Materials, and explain the reasons of management and the
Independent Directors for recommending the approval of the Merger.
REQUIRED PARTNER VOTE. AmREIT will not participate in the Merger unless
its participation is approved by the Shareholders holding a majority of
AmREIT's outstanding Shares eligible to vote on the Merger. See "THE MERGER"
for discussion of other conditions precedent to AmREIT's proceeding with the
Merger.
Upon expiration of the AmREIT Solicitation Period, AmREIT will promptly:
(a) Determine from the Transfer Agent if the required vote of
the Shareholders has approved participation in the Merger;
(b) Determine whether the conditions to the consummation of the
Merger or, to the extent allowed and deemed appropriate, said conditions waived
by AmREIT;
Subject to satisfaction of (a) and (b) above, proceed with
consummation of the Merger as soon as reasonably practicable following the
completion of the AmREIT Solicitation Period.
SHAREHOLDER VOTING PROCEDURES. The AmREIT Consent constitutes the ballot
to be used by a Shareholder in casting his or her votes for or against the
Merger. By marking this ballot, the Shareholder may either vote "yes," "no" or
"abstain" as to participation in the Merger. A "yes" vote will constitute a
vote in favor of the Merger with respect to any one or more of the
Partnerships. Any Shareholder who completes his or her ballot in an
unintelligible manner will be deemed to have abstained from voting. Any
Shareholder who submits a signed but unmarked ballot will be deemed to have
voted "yes" for the Merger.
The Transfer Agent will tabulate and certify the timely receipt and vote
of the AmREIT Consents. Determinations by the Transfer Agent as to time of
receipt and vote of the AmREIT Consents will be determinative and final. Other
than questions as to timely receipt and vote, all questions as to the validity,
form, eligibility (including time of receipt), acceptance and withdrawal of the
AmREIT Consents will be determined by AmREIT, whose determination will be final
and binding. The Transfer Agent reserves the absolute right to reject any or
all AmREIT Consents that are not in proper form or the acceptance of which, in
its opinion, would be improper. AmREIT reserves the right to waive any
irregularities or conditions of the AmREIT Consent as to the particular Shares.
Unless waived, any irregularities in connection with the AmREIT Consents must
be cured within such time as the Transfer Agent shall determine. The Transfer
Agent is under no duty to give notification of defects in such AmREIT Consents,
and shall not incur liabilities for failure to give such notification. The
delivery of the AmREIT Consents will not be deemed to have been made until such
irregularities have been cured or waived.
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<PAGE>
For his or her AmREIT Consent to be effective, it must be delivered to
the Transfer Agent prior to the expiration of the Solicitation Period at the
following address: The Bank of New York, 101 Barclay Street, New York, N.Y.
10286: Attention AmREIT Consents.
A self-addressed, stamped envelope for return of the AmREIT Consent has
been included with the Solicitation Materials. Completed AmREIT Consents
should be delivered only to the AmREIT Tabulation Agent. The AmREIT Consents
will be effective upon actual receipt by the AmREIT Tabulation Agent. The
method of delivery of the AmREIT Consent is at the election and risk of the
Shareholder, but if such delivery is by mail it is suggested that the mailing
be made sufficiently in advance of _____________, 1998, to permit delivery to
the AmREIT Tabulation Agent on or before _____________, 1998, the last day of
the Solicitation Period (unless extended).
EACH SHAREHOLDER IS STRONGLY URGED TO COMPLETE AND EXECUTE THE AMREIT
CONSENT IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED THEREIN.
If a Shareholder has any questions regarding the completion of his or her
AmREIT Consent, he or she should call Timothy W. Kelley, Vice President,
toll-free at (800) 888-4400, ext. 26, or by FAX to _______________.
WITHDRAWAL RIGHTS; CHANGE OF VOTE
AmREIT Consents may be withdrawn at any time prior to the end of the
AmREIT Solicitation Period. For a withdrawal to be effective, a written or
facsimile transmission notice of withdrawal must be timely received by the
Transfer Agent at its address, set forth above, and must specify the name of
the person having executed the AmREIT Consent to be withdrawn, the name of the
registered holder, if different from that of the person who executed the AmREIT
Consent, and AmREIT to which such withdrawal relates.
A Shareholder may submit a second AmREIT Consent after withdrawal of his
or her first AmREIT Consent as aforesaid, provided the second AmREIT Consent is
submitted prior to the end of the AmREIT Solicitation Period. Additional
AmREIT Consents may be obtained upon oral or written request, without charge,
from AmREIT. Subsequent to submission of his or her AmREIT Consent, but prior
to the end of the AmREIT Solicitation Period, a Shareholder may change his or
her vote in favor of or against, or to abstain with respect to the Merger. To
change any information on a completed AmREIT Consent, a Shareholder must
withdraw the AmREIT Consent as aforesaid and submit a second AmREIT Consent in
accordance with the instructions set forth above prior to the end of the
Solicitation Period.
RECOMMENDATION. For the reasons described herein, the Independent
Directors approved the Merger Agreement and the issuance of Shares and Notes
thereunder. For this purpose, THE INDEPENDENT DIRECTORS BELIEVE THE TERMS OF
THE MERGER AGREEMENT ARE FAIR FROM A FINANCIAL POINT OF VIEW TO THE
SHAREHOLDERS OF AMREIT AND IN THE BEST INTEREST OF AMREIT AND ITS SHAREHOLDERS
AND UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS OF AMREIT VOTE FOR APPROVAL OF
THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES AND NOTES PURSUANT THERETO. In
making its recommendation, the Independent Directors considered, among other
things, the opinion of Bishop-Crown that the consideration to be paid by AmREIT
pursuant to the Merger is fair to AmREIT from a financial
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<PAGE>
point of view. See "THE MERGER -- Background of and Reasons for the Merger" and
"-- Fairness Opinions."
PARTNERSHIP CONSENT PROCEDURES
TABULATION OF PARTNERSHIP CONSENTS. Limited Partners of record, as of
the close of business on the Record Date, are entitled to submit their vote on
the Merger and the Partnership Amendment by timely submitting their Partnership
Consent. Partnership Consents submitted by the Limited Partners will be
received, tabulated and certified as to time of delivery and vote by C.H.G.
Properties, Inc., the Partnership Tabulation Agent. The Partnership Tabulation
Agent is independent of and unaffiliated with the Partnerships and Partnership.
C.H.G. Properties, Inc. is an affiliate of Bishop-Crown.
PARTNERSHIP CONSENT SOLICITATION PERIODS. This Prospectus, together with
the Letter of Instructions, the Partnership Consent and any other solicitation
materials which may be distributed to Limited Partners by the General Partner,
constitute the Solicitation Materials distributed to the Limited Partners to
obtain their votes (consents) for their Partnership's participation in the
Merger, in which the Limited Partners may elect to receive Shares and/or Notes
with respect to their investments. The Solicitation Period is the time frame
during which the Limited Partners may vote for or against the Merger and, as
applicable, elect to receive Shares or Notes should their Partnership
participate in the Merger.
The Partnership Solicitation Period will commence upon mailing of the
Solicitation Materials (of which the Prospectus is a part) to the Limited
Partners (which mailing is expected to be on or about _____________, 1998) and
will continue, unless sooner terminated, to the later of (a) ______________,
1998 or (b) such later date as may be selected by the General Partner (the
"Partnership Solicitation Period Expiration Date"). At his discretion, the
General Partner may elect to extend the Partnership Solicitation Period from
time to time. Any Consents delivered to the Partnership Tabulation Agent prior
to 5:00 p.m., ___________ Standard Time, on the last date of the Partnership
Solicitation Period will be effective, provided that such Partnership Consents
have been properly completed, signed and delivered.
Before the Partnership Solicitation Expiration Date, the Tabulation Agent
will give notice to the General Partner at such time, if any, it receives
Consents voting in favor of the Merger from shareholders holding a majority of
the Units eligible to vote on the Merger. Thereafter, subject to prior
revocation or disqualification, the General Partner may, in its sole
discretion, provided that he has been advised by Partnership that its
Shareholders have consented to the Merger as of such date, terminate the
Partnership Solicitation Period.
None of the Partnerships has scheduled a special meeting of the Limited
Partners to discuss the Solicitation Materials or the terms of the Merger. The
General Partner intends to actively solicit the support of the Limited Partners
for the Merger and may, subject to applicable federal and state securities
laws, hold informal meetings with individual or groups of Limited Partners,
answer questions about the Merger and the Solicitation Materials, and explain
the General Partner's reasons for recommending the approval of the Merger.
REQUIRED PARTNER VOTE. No Partnership will participate in the Merger
unless its participation is approved by a Majority Vote of its Limited
Partners. See "THE MERGER" for discussion of other conditions precedent to the
Partnership's proceeding with the Merger.
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Upon expiration of the Partnership Solicitation Period, the General
Partner will promptly:
(d) Determine from the Tabulation Agent which
Partnerships have, by a Majority Vote of the Limited Partners, approved
participation in the Merger and the concurrent amendment of their Partnership
Agreement (see "The Merger" for a discussion of the proposed amendments to the
Partnership Agreements);
(e) Determine whether the conditions to the
consummation of the Merger or, to the extent allowed and deemed appropriate,
said conditions waived by the General Partner on behalf of the Partnerships;
(f) Subject to satisfaction of (a) and (b) above,
proceed with consummation of the Merger as soon as reasonably practicable
following the completion of the Partnership Solicitation Period.
LIMITED PARTNER VOTING PROCEDURES. The Partnership Consent constitutes
the ballot to be used by a Limited Partner in casting his or her votes for or
against the Merger. By marking this ballot, the Limited Partner may either
vote "yes," "no" or "abstain" as to his or her Partnership's participation in
the Merger, and may elect to receive Shares or Notes with respect to his or her
Units. A "yes" vote will also constitute a vote in favor of any related
Amendment to his or her particular Partnership Agreement. If a Limited Partner
owns Units in more than one Partnership, he or she can vote his or her Units in
one Partnership differently from his or her Units in another Partnership. Any
Limited Partner who completes his or her ballot in an unintelligible manner
will be deemed to have abstained from voting; and, if in such event, the
election for Notes is not clearly made on such Partnership Consent it will be
deemed not to have been made and he or she will receive Shares if his or her
Partnership participates in the Merger. Any Limited Partner who submits a
signed but unmarked ballot will be deemed to have voted "yes" for the Merger
and the Amendments; and if, in such event, the election for Notes is not
clearly made on such Partnership Consent, it will be deemed not to have been
made, and he or she will receive Shares if his or her Partnership participates
in the Merger.
Any Limited Partner who submits a Partnership Consent marked "No" to the
Merger will receive Notes should his or her Partnership participate in the
Merger unless he or she has marked his or her Partnership Consent to elect to
receive Shares. Such Limited Partner will be deemed a Dissenting Partner.
Dissenting Partners have no right to receive cash in exchange for their Units,
but may elect to receive Shares rather than Notes. Limited Partners who submit
Partnership Consents, but mark that they "abstain" from voting as to the Merger
will, if their Partnership chooses to participate in the Merger, receive Notes
unless they elect to receive Shares. Any Limited Partner who does not submit a
Partnership Consent will be deemed to have abstained from voting.
Federal income tax law requires that a Participating Limited Partner must
provide Partnership with his or her correct taxpayer identification number, in
the case of a Limited Partner who is an individual, his or her social security
number, or otherwise establish a basis for exemption from backup withholding.
Exempt holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. The General Partner currently has the correct taxpayer
identification numbers of each Participating Limited Partner and will deliver
these to Partnership upon the consummation of the Merger. However, Partnership
may request a Participating Limited Partner to provide and/or confirm his or
her taxpayer identification number. If Partnership is not provided with
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the correct taxpayer identification number, or an adequate basis for exemption,
upon such request, the Participating Limited Partner may be subject to a $50
penalty imposed by the IRS and interest and dividends paid may be subjected to
backup withholding. If withholding results in an overpayment of taxes, a
refund may be obtained.
The Tabulation Agent will tabulate and certify the timely receipt and
vote of the Partnership Consents. Determinations by the Partnership Tabulation
Agent as to time of receipt and vote of the Partnership Consents will be
determinative and final. Other than questions as to timely receipt and vote,
all questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Partnership Consents will be
determined by the General Partner, whose determination will be final and
binding. The Partnership Tabulation Agent reserves the absolute right to
reject any or all Partnership Consents that are not in proper form or the
acceptance of which, in its opinion, would be improper. The General partner
reserves the right to waive any irregularities or conditions of the Partnership
Consent as to the particular Units. Unless waived, any irregularities in
connection with the Partnership Consents must be cured within such time as the
Partnership Tabulation Agent shall determine. The Partnership Tabulation Agent
is under no duty to give notification of defects in such Partnership Consents,
and shall not incur liabilities for failure to give such notification. The
delivery of the Partnership Consents will not be deemed to have been made until
such irregularities have been cured or waived.
For his or her Partnership Consent to be effective, it must be delivered
to the Partnership Tabulation Agent prior to the expiration of the Solicitation
Period at the following address: 11545 W. Bernardo Court, Suite 100, San Diego,
California 92127.
A self-addressed, stamped envelope for return of the Partnership Consent
has been included with the Solicitation Materials. Completed Partnership
Consents should be delivered only to the Partnership Tabulation Agent. The
Partnership Consents will be effective upon actual receipt by the Partnership
Tabulation Agent. The method of delivery of the Partnership Consent is at the
election and risk of the Limited Partner, but if such delivery is by mail it is
suggested that the mailing be made sufficiently in advance of _____________,
1998, to permit delivery to the Partnership Tabulation Agent on or before
_____________, 1998, the last day of the Solicitation Period (unless extended).
EACH LIMITED PARTNER IS STRONGLY URGED TO COMPLETE AND EXECUTE THE
PARTNERSHIP CONSENT IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED THEREIN.
If a Limited Partner has any questions regarding the completion of his or
her Partnership Consent or the options available to him or her, he or she
should call the General Partner toll-free at (800) 888-4400, ext. 14, or by FAX
to _______________.
WITHDRAWAL RIGHTS; CHANGE OF VOTE
Partnership Consents may be withdrawn at any time prior to the end of the
Partnership Solicitation Period. For a withdrawal to be effective, a written
or facsimile transmission notice of withdrawal must be timely received by the
Partnership Tabulation Agent at its address, set forth above, and must specify
the name of the person having executed the Partnership Consent to be withdrawn,
the name of the registered holder, if different from that of the person who
executed the Partnership Consent, and the Partnership to which such withdrawal
relates.
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A Limited Partner may submit a second Partnership Consent after
withdrawal of his or her first Partnership Consent as aforesaid, provided the
second Partnership Consent is submitted prior to the end of the Partnership
Solicitation Period. Additional Partnership Consents may be obtained upon oral
or written request, without charge, from the General Partner. Subsequent to
submission of his or her Partnership Consent, but prior to the end of the
Partnership Solicitation Period with respect to his or her Partnership, a
Limited Partner may change his or her vote in favor of or against, or to
abstain with respect to, the Merger, or change his or her election to receive
Notes or Shares. To change any information on a completed Partnership Consent,
a Limited Partner must withdraw the Partnership Consent as aforesaid and submit
a second Partnership Consent in accordance with the instructions set forth
above prior to the end of the Solicitation Period.
RECOMMENDATION. For the reasons described herein, the General Partner
approved the Merger Agreement for each Partnership. THE GENERAL PARTNER
BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO
BE RECEIVED BY THE LIMITED PARTNERS IN THE MERGER, ARE FAIR TO AND IN THE BEST
INTERESTS OF THE RESPECTIVE LIMITED PARTNERS AND RECOMMENDS THAT THE LIMITED
PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE PARTNERSHIP
AMENDMENT. In making his recommendation, the General Partner considered, among
other things, the Houlihan Fairness Opinion that the consideration to be
received by the Limited Partners in connection with the Merger is fair to the
Limited Partners from a financial point of view. See "THE FAIRNESS OPINIONS
- -- The Houlihan Fairness Opinions."
LEGAL OPINIONS
The legality of the Shares to be issued in the Merger will be passed on
for AmREIT by Rushall & McGeever, APC, Carlsbad, California, counsel to AmREIT
and to each Partnership, which will deliver opinions to AmREIT and each
Partnership respectively, concerning federal income tax consequences of the
Merger.
SHAREHOLDER PROPOSALS
A proper proposal submitted by a shareholder for presentation at AmREIT's
annual meeting relating to fiscal year 1999 and received at AmREIT's principal
executive office no later than December ___, 1998 will be included in the
Consent Solicitation Statement and Consent related to such annual meeting.
OTHER MATTERS
The Management of AmREIT does not intend to bring any matter before the
Special Shareholders Meeting other than as specifically set forth in the Notice
of Special Meeting of Shareholders, nor does it know of any matter to be
brought before the Special Shareholders Meeting by others. If, however, any
other matters properly come before the Special Shareholders Meeting, it is the
intention of the Consent holders to vote such Consent in accordance with their
best judgment.
The General Partner does not intend to bring any matter before the
Special Partnership Meeting other than as specifically set forth in each Notice
of Special Meeting of Partners, nor does it know of any matter to be brought
before the Special Partnership Meeting by others. If, however, any other
matters properly
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come before the Special Partnership Meeting, it is the intention of the Consent
holders to vote such Consents in accordance with their best judgment.
GLOSSARY
"ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.
"ACMS" means asbestos-containing materials.
"ADA" means Americans with Disabilities Act of 1990.
"ADJUSTED CAPITAL" means as of the date determined, the aggregate
Original Investment (Original Capital as defined under the Agreement of Limited
Partnership of the Partnership) of the Limited Partners of a Partnership, less
cumulative distributions constituting a return of capital and less cumulative
distributions funded from net proceeds from the sale or refinancing of the
Partnerships' properties, determined pursuant to the Agreement of Limited
Partnership of the Partnership.
"ADVISER" means AmREIT's former external Adviser, American Asset Advisers
Realty Corporation, a Texas Corporation ("AAARC").
"ADVISER ACQUISITION" means the acquisition by AmREIT of its former
external adviser, American Asset Advisers Realty Corporation, which was
completed effective June 5, 1998.
"ADVISER ACQUISITION AGREEMENT" means the agreement dated June 5, 1998 by
and between the Adviser, AmREIT, AmREIT Operating Corporation and Mr. H. Kerr
Taylor.
"AFFILIATE" means with respect to a specified person, a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
"AmREIT" means American Asset Advisers Trust, Inc.
"AmREIT EXPENSES" means all documented out-of-pocket costs and expenses
(except the Partnerships' Proportionate Share) incurred by AmREIT in
connection with the Merger Agreement and the transactions contemplated thereby.
"AmREIT OPERATING CORPORATION" means AmREIT Operating Corporation, a
Texas corporation, and the wholly owned subsidiary of AmREIT.
"APPLICABLE COURT" means the court in which a petition demanding a
determination of the fair value of the Dissenting Units may be filed.
"ARTICLES OF INCORPORATION" means AmREIT's Articles of Incorporation, as
Amended.
"BISHOP-CROWN" means Bishop-Crown Investment Research, Inc.
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"BISHOP-CROWN FAIRNESS OPINION" means the fairness opinion of
Bishop-Crown delivered to the Independent Directors of AmREIT on
_______________, 1998.
"BOARD CHANGE" means the date that a majority of the Board is comprised
of persons other than persons (i) whose election or appointment shall not have
been solicited by the General Partner or (ii) who are serving as directors
appointed by the Board to fill vacancies caused by death or resignation (but
not removal) or to fill newly created directorships.
"BOARD OF DIRECTORS" or the "BOARD" means collectively the Board of Directors
of AmREIT.
"BUSINESS COMBINATION" means (A) any merger or consolidation, if and to
the extent permitted by law, of AmREIT or a subsidiary, with or into a Related
Person, (B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, of all or any Substantial Part (as hereinafter defined) of the
assets of AmREIT and its subsidiaries (taken as a whole) (including, without
limitation, any voting securities of a subsidiary) to or with a Related Person,
(C) the issuance or transfer by AmREIT or a subsidiary (other than by way of a
pro rata distribution to all shareholders) of any securities of AmREIT or a
subsidiary of AmREIT to a Related Person, (D) any reclassification of
securities (including any reverse Share split) or recapitalization by AmREIT,
the effect of which would be to increase the voting power (whether or not
currently exercisable) of the Related Person, (E) the adoption of any plan or
proposal for the liquidation or dissolution of AmREIT proposed by or on behalf
of a Related Person which involves any transfer of assets, or any other
transaction, in which the Related Person has any direct or indirect interest
(except proportionately as a shareholder), (F) any series or combination of
transactions having, directly or indirectly, the same or substantially the same
effect as any of the foregoing, and (G) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the foregoing.
"BYLAWS" means AmREIT's Amended and Restated Bylaws.
"CHANGE IN CONTROL" means (i) the sale or transfer of substantially all
of the assets of AmREIT or the Partnership, as the case may be, whether in one
transaction or a series of transactions, except a sale to a successor Person in
which the stockholders or Partners, as the case may be, immediately prior to
the transaction hold, directly or indirectly, at least 50% of the Total Voting
Power of the successor Person immediately after the transaction, (ii) any
merger or consolidation between AmREIT or the partnership, as the case may be,
and another Person immediately after which the stockholders hold, directly or
indirectly, less than 50% of the Total Voting Power of the surviving Person,
(iii) the dissolution or liquidation of AmREIT or the Partnership, as the case
may be, (iv) the acquisition by any Person acting in concert (and excluding
Persons or a group of Persons affiliated with the General Partner) or group of
Persons of direct or indirect beneficial ownership of securities representing
at least 50% of the Total Voting Power of AmREIT or the Partnership, as the
case may be, or (v) the date the Board changes.
"CHANGE IN MANAGEMENT" means the date that a majority of the Board of
Directors of AmREIT or one or more of the general partners of the Partnership,
as the case may be, shall be persons other than persons (i) whose election
proxies or Consents shall have been solicited by the General Partner, or (ii)
who are serving as directors of AmREIT appointed by the Board of Directors to
fill vacancies caused by death or resignation (but not by removal) or to fill
newly created directorships.
"CHARTER" means AmREIT's Articles of Incorporation, as amended.
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"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON SHARES" means shares of the REIT's common stock, $0.01 par value.
"CORPORATE SUBSIDIARIES" means AmREIT's wholly-owned corporate
subsidiaries.
"DISSENTERS' RIGHTS" means the right voluntarily granted by AmREIT to the
Limited Partners, respectively, to dissent with respect to the Merger and,
subject to certain conditions, receive payment in cash, in the case of AmREIT
shareholders, and Notes in the case of the Limited Partners, equal to the "fair
value" of his or her Dissenting Shares or Units.
"DISSENTING SHARES" means the Units held by Shareholders that exercise
Dissenters' Rights.
"DISSENTING UNITS" means the Units held by Limited Partners that exercise
Dissenters' Rights.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"EFFECTIVE TIME" means the effective time of the Merger.
"EXCHANGE PRICE" means $9.34 per Share.
"EXCHANGE RATIO" means the number of Shares offered per each Limited
Partner Unit owned in the respective Partnerships.
"EXEMPT ORGANIZATIONS" means the tax exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"EXPENSES" means collectively AmREIT Expenses and the Partnership
Expenses.
"FAD" means funds available for distribution.
"FFO" means funds from operations.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980,
as amended.
"FUND III" means Taylor Income Investors III, Ltd., a Texas Limited
Partnership.
"FUND III" means Taylor Income Investors III, Ltd., a Texas Limited
Partnership.
"FUND IV" means Taylor Income Investors IV, Ltd., a Texas Limited
Partnership.
"FUND V" means Taylor Income Investors V, Ltd., a Texas Limited
Partnership.
"FUND VI" means Taylor Income Investors VI, Ltd., a Texas Limited
Partnership.
"FUND VII" means AAA Net Realty Fund VII, Ltd., a Texas Limited
Partnership.
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"FUND VIII" means AAA Net Realty Fund VIII, Ltd., a Texas Limited
Partnership.
"FUND GDYR" means AAA Net Realty Fund - Goodyear, Ltd., a Texas Limited
Partnership.
"FUND IX" means AAA Net Realty Fund IX, Ltd., a Nebraska Limited
Partnership.
"FUND X" means AAA Net Realty Fund X, Ltd., a Nebraska Limited
Partnership.
"FUND XI" means AAA Net Realty Fund XI, Ltd., a Texas Limited
Partnership.
"GENERAL PARTNER" means Mr. H. Kerr Taylor.
"HOULIHAN" means Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
"HOULIHAN FAIRNESS OPINIONS" means the fairness opinions of Houlihan
delivered to the General Partner on behalf of the Partnerships on ___________,
1998.
"INDEPENDENT DIRECTORS" means all of the Directors of AmREIT who are not
Affiliates of the General Partner. As of the date of this Prospectus, AmREIT's
two Independent Directors are Robert S. Cartwright, Jr. and George A. McCanse,
Jr.
"KNOWLEDGE" means the knowledge of the General Partner or the collective
knowledge of the Officers of AmREIT, or a corporate general partner of the
Partnership after reasonable investigation. For the purposes of this
Prospectus the knowledge of one Officer shall be attributed to the other
Officer.
"LIQUIDATED DAMAGES AMOUNT" means $500,000.
"LIMITED PARTNERS" means, collectively, the holders of Units in the
Partnerships.
"L.P. VALUE" means the estimated value of the aggregate Limited Partners'
interest in each Partnership.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, properties, operations, condition or future prospects (financial or
otherwise) of AmREIT or the Partnership, as the case may be.
"MERGER" means the merging of the Partnerships with and into AmREIT.
"MERGER AGREEMENT" means, collectively, the Agreements and Plans of
Merger dated as of ___________, 1998 by and between AmREIT and each of the
Partnerships.
"MERGER CONSIDERATION" means the Shares and/or Notes to be received by
Limited Partners in connection with the Merger.
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"MERGER EXPENSES" means the aggregate costs and expenses of the Merger,
including but not limited to, legal and accounting fees in connection with the
preparation of this Prospectus and the preparation of the Merger documentation,
printing costs and the costs of obtaining required governmental approval or
review of the Merger. Merger Expenses do not include a participant's direct
costs for investor communications.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NET ASSET VALUE" or "NAV" means, as of the Valuation Date, the sum of
the sales price of a Partnership's properties plus its Net Cash as of the
Closing Date.
"NET CASH" means, as of the date of determination, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the Partnership's
liabilities determined on an accrual accounting basis.
"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign holders of Shares.
"NOTES" means AmREIT's 6.0% unsecured convertible notes due December 31,
2004 offered in the Merger.
"ORIGINAL INVESTMENT" means the Limited Partners' aggregate contributions
to the capital of a Partnership.
"PARTNERSHIP EXPENSES" means all documented out-of-pocket costs and
expenses (up to a maximum of a Partnership's Proportionate Share of $150,000)
incurred by the Partnership in connection with the Merger Agreement and the
transactions contemplated thereby.
"PARTNERSHIP MATERIAL ADVERSE EFFECT" shall have the meaning set forth in
the Merger Agreement.
"PARTNERSHIPS" means: FUND III, FUND IV, FUND V, FUND VI, FUND VII, FUND
VIII, FUND GDYR, FUND IX, FUND X, and FUND XI.
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"QUALIFYING INCOME" means income described in Section 856(c)(2)(A)-(H)
and 856(c)(3)(A)-(I) of the Code.
"R&D" means research and development.
"REIT" means a real estate investment trust.
"REIT ACQUISITION PROPOSAL" shall have the meaning set forth in the
Merger Agreement.
"RENT" means rent received by AmREIT or by a Partnership from its
tenants.
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"SHARES" means AmREIT's Common Shares Offered in the Merger.
"STATED INVESTMENT POLICIES" means the investment policies and
restrictions regarding AmREIT's investments and operations set forth in the
Bylaws.
"SUBSTANTIAL PART" means more than 35% of the book value of the total
assets of AmREIT and its subsidiaries (taken as a whole) as of the end of the
fiscal year ending prior to the time the determination is made.
"TOTAL VOTING POWER" means the total number of votes which may be case in
the election of directors of AmREIT to remove and replace a general partner of
the Partnership, as the case may be, by all stockholders or partners entitled
to vote in such an election.
"UBTI" means unrelated business taxable income.
"UNITS" means Units of Limited Partner interests in any of the
Partnerships.
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INDEX TO FINANCIAL INFORMATION
AmREIT:
Pro Forma Financial Information (unaudited) F-5
Assumption 1 - 100% participation, no Notes issued:
Pro Forma Balance Sheet as of March 31, 1998 (unaudited) F-6
Notes to Pro Forma Balance Sheet as of March 31, 1998
(unaudited) F-7
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited) F-9
Notes to Pro Forma Statement of Operations (unaudited) F-10
Pro Forma Statement of Operations for the Three Months
Ended March 31, 1998 (unaudited) F-11
Notes to Pro Forma Statement of Operations (unaudited) F-12
Assumption 2 - 100% participation, 20% Notes issued:
Pro Forma Balance Sheet as of March 31, 1998 (unaudited) F-13
Notes to Pro Forma Balance Sheet as of March 31, 1998
(unaudited) F-14
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited) F-16
Notes to Pro Forma Statement of Operations (unaudited) F-17
Pro Forma Statement of Operations for the Three Months
Ended March 31, 1998 (unaudited) F-18
Notes to Pro Forma Statement of Operations (unaudited) F-19
F-1
Assumption 3 - 50% participation, no Notes issued:
Pro Forma Balance Sheet as of March 31, 1998 (unaudited) F-20
Notes to Pro Forma Balance Sheet as of March 31, 1998
(unaudited) F-21
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited) F-23
Notes to Pro Forma Statement of Operations (unaudited) F-24
Pro Forma Statement of Operations for the Three Months
Ended March 31, 1998 (unaudited) F-25
Notes to Pro Forma Statement of Operations (unaudited) F-26
Assumption 4 - 50% participation, 20% Notes issued:
Pro Forma Balance Sheet as of March 31, 1998 (unaudited) F-27
Notes to Pro Forma Balance Sheet as of March 31, 1998
(unaudited) F-28
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited) F-30
Notes to Pro Forma Statement of Operations (unaudited) F-31
Pro Forma Statement of Operations for the Three Months
Ended March 31, 1998 (unaudited) F-32
Notes to Pro Forma Statement of Operations (unaudited) F-33
F-2
Historical Financial Information
Financial Statements for the Three Months Ended March 31, 1998
and 1997 (unaudited)
Consolidated Balance Sheets as of March 31, 1998 (unaudited) F-34
Consolidated Statement of Income for the Three Months Ended
March 31, 1998 and 1997 (unaudited) F-35
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (unaudited) F-36
Notes to Consolidated Financial Statements for Three Months
Ended March 31, 1998 and 1997 (unaudited) F-37
Financial Statements for the Years Ended December 31, 1997 and 1996
Independent Auditors' Report F-44
Consolidated Balance Sheet, December 31, 1997 F-45
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996 F-46
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997 and 1996 F-47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-48
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997 and 1996 F-49
F-3
Partnership Properties:
Statements of Rental Income for the Years Ended December 31, 1996
and 1997:
Independent Auditors Report F-57
Combined Statements of Revenue and Certain Expenses of Real
Estate Properties Anticipated to be Acquired F-58
Notes to Combined Statements of Revenue and Certain Expenses
of Real Estate Properties Anticipated to be Acquired F-59
F-4
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected unaudited pro forma financial information
for American Asset Advisers Trust, Inc. (the "Company") gives
effect to the merger as defined elsewhere herein and is based on
estimates and assumptions set forth in the notes to the financial
statements which include pro forma adjustments. The unaudited
pro forma financial information also gives effect to the recently
completed merger between the Company and American Asset Advisers
(the "Adviser"). This unaudited pro forma financial information
has been prepared from the historical financial statements of the
Company, the Adviser and the Partnerships that currently own the
properties (the "Partnerships"). The pro forma balance sheet
assumes that both mergers occurred on March 31, 1998. The pro
forma statements of operations assumes that both mergers occurred
on January 1, 1997. The pro forma adjustments do not reflect the
final amounts which will be determined at closing. Management
does not anticipate that final amounts will be materially
different.
There are a large number of combinations of Partnership
participation in the merger. The actual combination that will
result cannot possibly be known or predicted until the votes of
the partners of the Partnerships have been determined.
The unaudited pro forma financial information does not purport to
be indicative of the results which actually would have been
obtained if the merger had been effected on the dates indicated
or of the results which may be obtained in the future and should
be read in conjunction with the annual financial statements and
notes thereto of the Partnerships and the Company.
F-5
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,295,473 - $ 326,498 (5) $ 1,690,971
69,000 (8)
Accounts receivable 38,046 - 24,404 (5) 62,450
Property, net 25,502,340 70,750 (2) 22,295,079 (5) 48,103,169
235,000 (7)
Net investment in direct financing leases 3,163,740 - 3,163,740
Note receivable - - 208,856 (5) 208,856
Other assets 674,590 - - 674,590
Total assets $30,674,189 $ 70,750 $ 23,158,837 $53,903,776
LIABILITIES & SHAREHOLDERS' & PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,918,884 - $ - $ 8,918,884
Estimated obligation to shareholder - 200,000 (3) - 200,000
Accounts payable 16,047 - 235,000 (7) 285,915
34,868 (5)
Capital lease payable - 6,272 (4) - 6,272
Security deposit 15,050 - 25,800 (5) 40,850
Total liabilities 8,949,981 206,272 295,668 9,451,921
MINORITY INTEREST 5,256,065 - (5,256,065)(5) -
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 1,994,804 and 5,218,689
shares issued and outstanding on historical 19,948 2,133 (3) 74 (8) 52,187
and pro-forma basis, respectively 30,032 (6)
Capital in excess of par value 17,806,708 2,183,782 (3) 28,020,202 (6) 48,144,096
70,750 (2) 68,926 (8)
(6,272)(4)
Accumulated distributions in excess of earnings (1,358,513) (2,385,915)(3) - (3,744,428)
Total shareholders' and partners' equity 16,468,143 (135,522) 28,119,234 44,451,855
Total liabilities and shareholders' and
partners' equity $30,674,189 $ 70,750 $ 23,158,837 $53,903,776
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-6
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser were completed on
March 31, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition
of the Partnership properties are based on the assumption
that the acquisitions are approved by 100% of the limited
partners and that none of the partners elect to take a note
in lieu of Company stock.
(2) Represents the addition of office furniture and equipment.
(3) Represents the issuance of 213,260 shares of Common Stock in
consideration for the acquisition of the Adviser at a price of
$10.25 per share, the selling price under the Company's current
offering, plus an estimated obligation to the shareholder of the
Adviser in the amount of $200,000 plus estimated transaction
costs of $465,000. This amount has been accounted for as costs
incurred in acquiring the Adviser from a related party because
the Adviser has not been deemed to quality as a "business" for
purposes of applying APB Opinion No. 16, "Business Combinations".
This adjustment does not include any shares potentially issuable
in accordance with the Agreement and Plan of Merger since the Pro
Forma Balance Sheet was prepared as if the merger occurred on
March 31, 1998 and the issuance of any additional shares is
independent upon the achievement of events subsequent to the
closing of the merger. As of March 31, 1998, all of the $465,000
of transaction costs had been incurred and charged to expense.
Consideration for the Adviser $ 2,385,915
(to be expensed upon consummation of transaction)
Common Stock issued $ 2,133
Capital in excess of par value 2,183,782
Retained earnings (2,385,915)
Net decrease in equity $ 200,000
The $200,000 estimated obligation to the shareholder of the
Adviser represents the estimated excess current liabilities
over the current assets of the Adviser at the closing date
("Current Liability Excess"). This amount is payable at the
election of the Company in either cash or common stock valued
at a price of $10.25 per share. The remaining share balance
will be reduced by the number of shares equal to the Current
Liability Excess divided by $10.25.
In addition, up to 686,740 shares of stock valued at
$7,039,085 are contingently issuable for a period of up to 24
calendar quarters following the closing of the transaction.
Within 30 days after the end of each calendar quarter, shares
will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of
the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these
additional shares will be expensed as they are issued.
(4) Represents a capital lease obligation related to office
equipment.
F-7
(5) Represents adjustments for the purchase method of accounting
whereby the real estate owned by the Partnerships is allocated
based on the estimated fair market value and the cash,
receivables, payables and security deposits of the Partnerships
is recorded at book value, which approximates its fair value, as
follows:
Real Estate Other Total
Taylor Income Investors III, Ltd. $ 1,000,000 $ 31,997 $ 1,031,997
Taylor Income Investors IV, Ltd. 462,836 128,288 591,124
Taylor Income Investors V, Ltd. 328,308 107,517 435,825
Taylor Income Investors VI, Ltd. 300,000 (500) 299,500
AAA Net Realty Fund VII, Ltd. 950,000 28,845 978,845
AAA Net Realty Fund VIII, Ltd. 1,900,000 42,932 1,942,932
AAA Net Realty Fund Goodyear, Ltd. 1,050,000 34,082 1,084,082
AAA Net Realty Fund IX, Ltd. 4,950,000 68,471 5,018,471
AAA Net Realty Fund X, Ltd. 10,400,000 (23,188) 10,376,812
AAA Net Realty Fund XI, Ltd. 6,210,000 80,646 6,290,646
27,551,144 499,090 28,050,234
Less: Minority Interest 5,256,065 - 5,256,065
Net Adjustment $ 22,295,079 $ 499,090 $ 22,794,169
<TABLE>
(6) Represents the issuance of 3,003,237 shares of Company stock
valued at $28,050,234 based upon a per share price of $9.34
as follows:
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 116.92 945.00 110,492 $ 1,031,995
Taylor Income Investors IV, Ltd. 102.91 615.00 63,290 591,129
Taylor Income Investors V, Ltd. 97.21 480.00 46,663 435,832
Taylor Income Investors VI, Ltd. 106.89 300.00 32,066 299,496
AAA Net Realty Fund VII, Ltd. 92.22 1125.00 103,752 969,044
AAA Net Realty Fund VIII, Ltd. 110.72 1860.00 205,935 1,923,433
AAA Net Realty Fund Goodyear, Ltd. 86.08 1335.00 114,923 1,073,381
AAA Net Realty Fund IX, Ltd. 99.68 5390.50 537,310 5,018,475
AAA Net Realty Fund X, Ltd. 97.00 11453.60 1,111,007 10,376,805
AAA Net Realty Fund XI, Ltd. 95.38 7061.21 673,516 6,290,640
Total Limited Partners 2,998,954 28,010,230
General Partners 4,283 40,004
Total 3,003,237 $ 28,050,234
</TABLE>
(7) Represents estimated legal and professional fees, which will
be capitalized as acquisition costs.
(8) Represents the issuance of 7,388 shares of the Company's
stock based upon a per share price of $9.34. The shares will
be acquired with cash by the Company's president.
F-8
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (4) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $1,217,187 - $2,159,984 $3,377,171
Earned income from direct financing 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 24,836 178,731
TOTAL REVENUES 1,710,710 309,248 2,184,820 4,204,778
EXPENSES
General operating and administrative 112,464 76,913 53,711 243,088
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 540,808 702,254
Interest 6,000 18,202 - 24,202
Acquisition costs 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 594,519 1,138,834
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 1,590,301 3,065,944
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 455,226 -
PRO FORMA NET INCOME $ 538,857 $ 481,560 $2,045,527 $3,065,944
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.63
Diluted $ 0.33 $ 0.62
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 4,866,136
Diluted 1,624,217 4,927,305
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-9
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of
January 1, 1997. The Partnership properties include the
acquisition of a minority interest in several joint ventures with
the Company. Pro forma adjustments from the acquisition of
Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and
that none of the partners elect to take a note in lieu of Company
stock.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) To the extent that the consideration paid for the Adviser
exceeds the fair market value of the net tangible assets
received, an expense will be recorded as an operating expense on
the Company's Statement of Operations. Because the purpose of
the pro forma statement of operations is to reflect the expected
continuing impact of the merger on the Company, this adjustment
has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year
ended December 31, 1997, this pro forma expense would have been
$5,354,045 based on the issuance of 213,260 shares at closing on
January 1, 1997 and 316,813 additional shares issued during the
year in accordance with the partial satisfaction of the share
balance issuance criteria described in the Agreement and Plan of
Merger. Up to 686,740 shares of stock are contingently issuable
for a period of up to 24 calendar quarters following the closing
of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where
total shares issued to the shareholder of the Adviser pursuant to
the acquisition of the Adviser does not exceed 9.8% of the
Company's total shares then issued and outstanding. Based on the
pro forma financial statement 369,927 of these shares remain at
December 31, 1997. The issuance of these additional shares will
be expensed as they are issued.
Pro forma weighted average shares outstanding consists of
the historical weighted average shares outstanding of the
Company, the shares issued for both mergers on January 1,
1997 and 25% of the additional shares issued for the Adviser
during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-10
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (3) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $ 436,009 - $ 572,025 $1,008,034
Earned income from direct financing leases 85,103 - - 85,103
Service fee income - 59,292 - 59,292
Interest income 19,782 - 10,340 30,122
TOTAL REVENUES 540,894 59,292 582,365 1,182,551
EXPENSES
General operating and administrative 68,793 64,778 13,428 146,999
Reimbursements and fees to related 17,660 - - 17,660
Amortization 15,688 8 - 15,696
Depreciation 56,949 4,713 135,202 196,864
Interest 26,895 199 - 27,094
Acquisition costs 182,322 (182,322) - -
TOTAL EXPENSES 368,307 (112,624) 148,630 404,313
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 172,587 171,916 433,735 778,238
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (135,359) - 135,359 -
PRO FORMA NET INCOME $ 37,228 $ 171,916 $ 569,094 $ 778,238
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.02 $ 0.14
Diluted $ 0.02 $ 0.14
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,926,132 5,456,830
Diluted 1,926,132 5,456,830
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-11
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of
January 1, 1997. The Partnership properties include the
acquisition of a minority interest in several joint ventures with
the Company. Pro forma adjustments from the acquisition of
Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and
that none of the partners elect to take a note in lieu of Company
stock.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-12
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,295,473 - $ 326,498 (5) $ 1,690,971
69,000 (9)
Accounts receivable 38,046 - 24,404 (5) 62,450
Property, net 25,502,340 70,750 (2) 22,014,577 (5) 47,822,667
235,000 (7)
Net investment in direct financing leases 3,163,740 - - 3,163,740
Note receivable - - 208,856 (5) 208,856
Other assets 674,590 - - 674,590
Total assets $30,674,189 $ 70,750 $ 22,878,335 $53,623,274
LIABILITIES & SHAREHOLDERS' & PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,918,884 - $ 5,329,544 (8) $14,248,428
Estimated obligation to shareholder - 200,000 (3) - 200,000
Accounts payable 16,047 - 235,000 (7) 285,915
34,868 (5)
Capital lease payable - 6,272 (4) - 6,272
Security deposit 15,050 - 25,800 (5) 40,850
Total liabilities 8,949,981 206,272 5,625,212 14,781,465
MINORITY INTEREST 5,256,065 - (5,256,065)(5) -
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 1,994,804 and 4,618,041
shares issued and outstanding on historical 19,948 2,133 (3) 74 (9) 46,181
and pro-forma basis, respectively 24,026 (6)
Capital in excess of par value 17,806,708 2,183,782 (3) 22,416,162 (6) 42,540,056
70,750 (2)
(6,272)(4) 68,926 (9)
Accumulated distributions in excess of earnings (1,358,513) (2,385,915)(3) - (3,744,428)
Total shareholders' and partners' equity 16,468,143 (135,522) 22,509,188 38,841,809
Total liabilities and shareholders' and
partners' equity $30,674,189 $ 70,750 $ 22,878,335 $53,623,274
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-13
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser were completed on
March 31, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition
of the Partnership properties are based on the assumption
that the acquisitions are approved by 100% of the limited
partners and that 20% of the partners elect to take notes in
lieu of Company stock.
(2) Represents the addition of office furniture and equipment.
(3) Represents the issuance of 213,260 shares of Common Stock in
consideration for the acquisition of the Adviser at a price of
$10.25 per share, the selling price under the Company's current
offering, plus an estimated obligation to the shareholder of the
Adviser in the amount of $200,000 plus estimated transaction
costs of $465,000. This amount has been accounted for as costs
incurred in acquiring the Adviser from a related party because
the Adviser has not been deemed to quality as a "business" for
purposes of applying APB Opinion No. 16, "Business Combinations".
This adjustment does not include any shares potentially issuable
in accordance with the Agreement and Plan of Merger since the Pro
Forma Balance Sheet was prepared as if the merger occurred on
March 31, 1998 and the issuance of any additional shares is
dependent upon the achievement of events subsequent to the
closing of the merger. As of March 31, 1998, all of the $465,000
of transaction costs had been incurred and charged to expense.
Consideration for the Adviser $ 2,385,915
(to be expensed upon consummation of transaction)
Common Stock issued $ 2,133
Capital in excess of par value 2,183,782
Retained earnings (2,385,915)
Net decrease in equity $ 200,000
The $200,000 estimated obligation to the shareholder of the
Adviser represents the estimated excess current liabilities
over the current assets of the Adviser at the closing date
("Current Liability Excess"). This amount is payable at the
election of the Company in either cash or common stock valued
at a price of $10.25 per share. The remaining share balance
will be reduced by the number of shares equal to the Current
Liability Excess divided by $10.25.
In addition, up to 686,740 shares of stock valued at
$7,039,085 are contingently issuable for a period of up to 24
calendar quarters following the closing of the transaction.
Within 30 days after the end of each calendar quarter, shares
will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of
the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these
additional shares will be expensed as they are issued.
(4) Represents a capital lease obligation related to office
equipment.
F-14
(5) Represents adjustments for the purchase method of accounting
whereby the real estate owned by the Partnerships is
allocated based on the estimated fair market value and the
cash, receivables, payables and security deposits of the
Partnerships is recorded at book value, which approximates
its fair value, as follows:
Real Estate Other Total
Taylor Income Investors III, Ltd. $ 989,819 $ 31,997 $ 1,021,816
Taylor Income Investors IV, Ltd. 458,124 128,288 586,412
Taylor Income Investors V, Ltd. 324,965 107,517 432,482
Taylor Income Investors VI, Ltd. 296,946 (500) 296,446
AAA Net Realty Fund VII, Ltd. 940,328 28,845 969,173
AAA Net Realty Fund VIII, Ltd. 1,880,656 42,932 1,923,588
AAA Net Realty Fund Goodyear, Ltd. 1,039,310 34,082 1,073,392
AAA Net Realty Fund IX, Ltd. 4,899,603 68,471 4,968,074
AAA Net Realty Fund X, Ltd. 10,294,116 (23,188) 10,270,928
AAA Net Realty Fund XI, Ltd. 6,146,775 80,646 6,227,421
27,270,642 499,090 27,769,732
Less: Minority Interest 5,256,065 - 5,256,065
Net Adjustment $ 22,014,577 $ 499,090 $ 22,513,667
<TABLE>
(5) Represents the issuance of 2,402,589 shares of Company stock
valued at $22,440,188 based upon a per share price of $9.34 as
follows:
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 116.92 756.00 88,394 $ 825,596
Taylor Income Investors IV, Ltd. 102.91 492.00 50,632 472,903
Taylor Income Investors V, Ltd. 97.21 384.00 37,330 348,666
Taylor Income Investors VI, Ltd. 106.89 240.00 25,653 239,597
AAA Net Realty Fund VII, Ltd. 92.22 900.00 83,002 775,235
AAA Net Realty Fund VIII, Ltd. 110.72 1488.00 164,748 1,538,746
AAA Net Realty Fund Goodyear, Ltd. 86.08 1068.00 91,938 858,705
AAA Net Realty Fund IX, Ltd. 99.68 4312.40 429,848 4,014,780
AAA Net Realty Fund X, Ltd. 97.00 9162.90 888,806 8,301,444
AAA Net Realty Fund XI, Ltd. 95.38 5649.00 538,813 5,032,512
Total Limited Partners 2,399,164 22,408,184
General Partners 3,425 32,004
Total 2,402,589 $22,440,188
</TABLE>
(7) Represents estimated legal and professional fees, which will
be capitalized as acquisition costs.
(8) Represents notes to 20% of the limited partners in lieu of
Company stock payable at 95% of the fair value of the
Partnerships' net assets.
(9) Represents the issuance of 7,388 shares of the Company's
stock based upon a per share price of $9.34. The shares will be
acquired with cash by the Company's president.
F-15
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (4) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $1,217,187 - $2,159,984 $3,377,171
Earned income from direct financing 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 24,836 178,731
TOTAL REVENUES 1,710,710 309,248 2,184,820 4,204,778
EXPENSES
General operating and administrative 112,464 76,913 53,711 243,088
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 534,854 696,300
Interest 6,000 18,202 319,773 343,975
Acquisition costs 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 908,338 1,452,653
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 1,276,482 2,752,125
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 455,226 -
PRO FORMA NET INCOME $ 538,857 $ 481,560 $1,731,708 $2,752,125
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.65
Diluted $ 0.33 $ 0.64
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 4,249,174
Diluted 1,624,217 4,310,343
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-16
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of
January 1, 1997. The Partnership properties include the
acquisition of a minority interest in several joint ventures with
the Company. Pro forma adjustments from the acquisition of
Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and
that 20% of the partners elect to take a note in lieu of Company
stock.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) To the extent that the consideration paid for the Adviser
exceeds the fair market value of the net tangible assets
received, an expense will be recorded as an operating expense on
the Company's Statement of Operations. Because the purpose of
the pro forma statement of operations is to reflect the expected
continuing impact of the merger on the Company, this adjustment
has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year
ended December 31, 1997, this pro forma expense would have been
$4,701,455 based on the issuance of 213,260 shares at closing on
January 1, 1997 and 251,554 additional shares issued during the
year in accordance with the partial satisfaction of the share
balance issuance criteria described in the Agreement and Plan of
Merger. Up to 686,740 shares of stock are contingently issuable
for a period of up to 24 calendar quarters following the closing
of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where
total shares issued to the shareholder of the Adviser pursuant to
the acquisition of the Adviser does not exceed 9.8% of the
Company's total shares then issued and outstanding. Based on the
pro forma financial statement 435,186 of these shares remain at
December 31, 1997. The issuance of these additional shares will
be expensed as they are issued.
Pro forma weighted average shares outstanding consists of
the historical weighted average shares outstanding of the
Company, the shares issued for both mergers on January 1,
1997 and 25% of the additional shares issued for the Adviser
during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o Interest expense on notes payable to certain limited
partners computed at 6% of the outstanding balance.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-17
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (3) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $ 436,009 - $ 572,025 $1,008,034
Earned income from direct financing leases 85,103 - - 85,103
Service fee income - 59,292 - 59,292
Interest income 19,782 - 10,340 30,122
TOTAL REVENUES 540,894 59,292 582,365 1,182,551
EXPENSES
General operating and administrative 68,793 64,778 13,428 146,999
Reimbursements and fees to related 17,660 - - 17,660
Amortization 15,688 8 - 15,696
Depreciation 56,949 4,713 133,713 195,375
Interest 26,895 199 79,943 107,037
Acquisition costs 182,322 (182,322) - -
TOTAL EXPENSES 368,307 (112,624) 227,084 482,767
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 172,587 171,916 355,281 699,784
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (135,359) - 135,359 -
PRO FORMA NET INCOME $ 37,228 $ 171,916 $ 490,640 $ 699,784
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.02 $ 0.15
Diluted $ 0.02 $ 0.15
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,926,132 4,800,923
Diluted 1,926,132 4,800,923
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-18
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of
January 1, 1997. The Partnership properties include the
acquisition of a minority interest in several joint ventures with
the Company. Pro forma adjustments from the acquisition of
Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and
that 20% of the partners elect to take a note in lieu of Company
stock.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o Interest expense on notes payable to certain limited
partners computed at 6% of the outstanding balance.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-19
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,295,473 - $ 163,249 (5) $ 1,493,222
34,500 (8)
Accounts receivable 38,046 - 12,202 (5) 50,248
Property, net 25,502,340 70,750 (2) 11,147,540 (5) 36,838,130
117,500 (7)
Net investment in direct financing leases 3,163,740 - 3,163,740
Note receivable - - 104,428 (5) 104,428
Other assets 674,590 - - 674,590
Total assets $30,674,189 $ 70,750 $ 11,579,419 $42,324,358
LIABILITIES & SHAREHOLDERS' & PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,918,884 - $ - $ 8,918,884
Estimated obligation to shareholder - 200,000 (3) - 200,000
Accounts payable 16,047 - 117,500 (7) 150,981
17,434 (5)
Capital lease payable - 6,272 (4) - 6,272
Security deposit 15,050 - 12,900 (5) 27,950
Total liabilities 8,949,981 206,272 147,834 9,304,087
MINORITY INTEREST 5,256,065 - (2,628,033)(5) 2,628,032
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 1,994,804 and 3,713,376
shares issued and outstanding on historical 19,948 2,133 (3) 37 (8) 37,134
and pro-forma basis, respectively 15,016 (6)
Capital in excess of par value 17,806,708 2,183,782 (3) 14,010,102 (6) 34,099,533
70,750 (2) 34,463 (8)
(6,272)(4)
Accumulated distributions in excess of earnings (1,358,513) (2,385,915)(3) - (3,744,428)
Total shareholders' and partners' equity 16,468,143 (135,522) 14,059,618 30,392,239
Total liabilities and shareholders' and
partners' equity $30,674,189 $ 70,750 $ 11,579,419 $42,324,358
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-20
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser were completed on
March 31, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition
of the Partnership properties are based on the assumption
that the acquisitions are approved by 50% of the limited
partners and that none of these partners elect to take a note
in lieu of Company stock. All of the Partnership properties
have the same characteristics and, therefore, the 50%
assumption is provided to assist the reader in evaluating
various scenarios. The pro forma entries assume that the
Company will maintain control over the properties to be
acquired.
(2) Represents the addition of office furniture and equipment.
(3) Represents the issuance of 213,260 shares of Common Stock in
consideration for the acquisition of the Adviser at a price of
$10.25 per share, the selling price under the Company's current
offering, plus an estimated obligation to the shareholder of the
Adviser in the amount of $200,000 plus estimated transaction
costs of $465,000. This amount has been accounted for as costs
incurred in acquiring the Adviser from a related party because
the Adviser has not been deemed to quality as a "business" for
purposes of applying APB Opinion No. 16, "Business Combinations".
This adjustment does not include any shares potentially issuable
in accordance with the Agreement and Plan of Merger since the Pro
Forma Balance Sheet was prepared as if the merger occurred on
March 31, 1998 and the issuance of any additional shares is
dependent upon the achievement of events subsequent to the
closing of the merger. As of March 31, 1998, all of the $465,000
of transaction costs had been incurred and charged to expense.
Consideration for the Adviser $ 2,385,915
(to be expensed upon consummation of transaction)
Common Stock issued $ 2,133
Capital in excess of par value 2,183,782
Retained earnings (2,385,915)
Net decrease in equity $ 200,000
The $200,000 estimated obligation to the shareholder of the
Adviser represents the estimated excess current liabilities
over the current assets of the Adviser at the closing date
("Current Liability Excess"). This amount is payable at the
election of the Company in either cash or common stock valued
at a price of $10.25 per share. The remaining share balance
will be reduced by the number of shares equal to the Current
Liability Excess divided by $10.25.
In addition, up to 686,740 shares of stock valued at
$7,039,085 are contingently issuable for a period of up to 24
calendar quarters following the closing of the transaction.
Within 30 days after the end of each calendar quarter, shares
will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of
the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these
additional shares will be expensed as they are issued.
(4) Represents a capital lease obligation related to office
equipment.
F-21
(5) Represents adjustments for the purchase method of accounting
whereby the real estate owned by the Partnerships is allocated
based on to the estimated fair market value and the cash,
receivables, payables and security deposits of the Partnerships
is recorded at book value, which approximates its fair value, as
follows:
Real Estate Other Total
Taylor Income Investors III, Ltd. $ 500,000 $ 15,998 $ 515,998
Taylor Income Investors IV, Ltd. 231,419 64,144 295,563
Taylor Income Investors V, Ltd. 164,154 53,759 217,913
Taylor Income Investors VI, Ltd. 150,000 (250) 149,750
AAA Net Realty Fund VII, Ltd. 475,000 14,422 489,422
AAA Net Realty Fund VIII, Ltd. 950,000 21,466 971,466
AAA Net Realty Fund Goodyear, Ltd. 525,000 17,041 542,041
AAA Net Realty Fund IX, Ltd. 2,475,000 34,236 2,509,236
AAA Net Realty Fund X, Ltd. 5,200,000 (11,594) 5,188,406
AAA Net Realty Fund XI, Ltd. 3,105,000 40,323 3,145,323
13,775,573 249,545 14,025,118
Less: Minority Interest 2,628,033 - 2,628,033
Net Adjustment $ 11,147,540 $ 249,545 $ 11,397,085
<TABLE>
(6) Represents the issuance of 1,501,619 shares of Company stock
valued at $14,025,118 based upon a per share price of $9.34
as follows:
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 116.92 472.50 55,246 $ 515,997
Taylor Income Investors IV, Ltd. 102.91 307.50 31,645 295,565
Taylor Income Investors V, Ltd. 97.21 240.00 23,331 217,916
Taylor Income Investors VI, Ltd. 106.89 150.00 16,033 149,748
AAA Net Realty Fund VII, Ltd. 92.22 562.50 51,876 484,522
AAA Net Realty Fund VIII, Ltd. 110.72 930.00 102,968 961,717
AAA Net Realty Fund Goodyear, Ltd. 86.08 667.50 57,461 536,690
AAA Net Realty Fund IX, Ltd. 99.68 2695.25 268,655 2,509,238
AAA Net Realty Fund X, Ltd. 97.00 5726.81 555,504 5,188,403
AAA Net Realty Fund XI, Ltd. 95.38 3530.61 336,758 3,145,320
Total Limited Partners 1,499,477 14,005,116
General Partners 2,142 20,002
Total 1,501,619 $14,025,118
</TABLE>
(7) Represents estimated legal and professional fees, which will
be capitalized as acquisition costs.
(8) Represents the issuance of 3,694 shares of the Company's
stock based upon a per share price of $9.34. The shares will be
acquired with cash by the Company's president.
F-22
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (4) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $1,217,187 - $1,079,992 $2,297,179
Earned income from direct financing 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 12,418 166,313
TOTAL REVENUES 1,710,710 309,248 1,092,410 3,112,368
EXPENSES
General operating and administrative 112,464 76,913 26,855 216,232
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 270,404 431,850
Interest 6,000 18,202 - 24,202
Acquisition costs 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 297,259 841,574
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 795,151 2,270,794
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 227,613 (227,613)
PRO FORMA NET INCOME $ 538,857 $ 481,560 $1,022,764 $2,043,181
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.62
Diluted $ 0.33 $ 0.60
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 3,319,937
Diluted 1,624,217 3,381,106
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-23
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of
January 1, 1997. The Partnership properties include the
acquisition of a minority interest in several joint ventures with
the Company. Pro forma adjustments from the acquisition of
Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that
none of the partners elect to take a note in lieu of Company
stock. The pro forma entries assume that the Company will
maintain control over the properties to be acquired.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) To the extent that the consideration paid for the Adviser
exceeds the fair market value of the net tangible assets
received, an expense will be recorded as an operating expense on
the Company's Statement of Operations. Because the purpose of
the pro forma statement of operations is to reflect the expected
continuing impact of the merger on the Company, this adjustment
has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year
ended December 31, 1997, this pro forma expense would have been
$3,718,565 based on the issuance of 213,260 shares at closing on
January 1, 1997 and 153,265 additional shares issued during the
year in accordance with the partial satisfaction of the share
balance issuance criteria described in the Agreement and Plan of
Merger. Up to 686,740 shares of stock are contingently issuable
for a period of up to 24 calendar quarters following the closing
of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where
total shares issued to the shareholder of the Adviser pursuant to
the acquisition of the Adviser does not exceed 9.8% of the
Company's total shares then issued and outstanding. Based on the
pro forma financial statement 533,475 of these shares remain at
December 31, 1997. The issuance of these additional shares will
be expensed as they are issued.
Pro forma weighted average shares outstanding consists of
the historical weighted average shares outstanding of the
Company, the shares issued for both mergers on January 1,
1997 and 25% of the additional shares issued for the Adviser
during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-24
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (3) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $ 436,009 - $ 286,013 $ 722,022
Earned income from direct financing leases 85,103 - - 85,103
Service fee income - 59,292 - 59,292
Interest income 19,782 - 5,170 24,952
TOTAL REVENUES 540,894 59,292 291,183 891,369
EXPENSES
General operating and administrative 68,793 64,778 6,714 140,285
Reimbursements and fees to related 17,660 - - 17,660
Amortization 15,688 8 - 15,696
Depreciation 56,949 4,713 67,601 129,263
Interest 26,895 199 - 27,094
Acquisition costs 182,322 (182,322) - -
TOTAL EXPENSES 368,307 (112,624) 74,315 329,998
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 172,587 171,916 216,868 561,371
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (135,359) - 67,680 (67,679)
PRO FORMA NET INCOME $ 37,228 $ 171,916 $ 284,548 $ 493,692
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.02 $ 0.13
Diluted $ 0.02 $ 0.13
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,926,132 3,797,970
Diluted 1,926,132 3,797,970
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-25
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of
January 1, 1997. The Partnership properties include the
acquisition of a minority interest in several joint ventures with
the Company. Pro forma adjustments from the acquisition of
Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that
none of the partners elect to take a note in lieu of Company
stock. The pro forma entries assume that the Company will
maintain control over the properties to be acquired.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-26
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,295,473 - $ 163,249 (5) $ 1,493,222
34,500 (9)
Accounts receivable 38,046 - 12,202 (5) 50,248
Property, net 25,502,340 70,750 (2) 11,007,289 (5) 36,697,879
117,500 (7)
Net investment in direct financing leases 3,163,740 - - 3,163,740
Note receivable - - 104,428 (5) 104,428
Other assets 674,590 - - 674,590
Total assets $30,674,189 $ 70,750 $ 11,439,168 $42,184,107
LIABILITIES & SHAREHOLDERS' & PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,918,884 - $ 2,664,772 (8) $11,583,656
Estimated obligation to shareholder - 200,000 (3) - 200,000
Accounts payable 16,047 - 117,500 (7) 150,981
17,434 (5)
Capital lease payable - 6,272 (4) - 6,272
Security deposit 15,050 - 12,900 (5) 27,950
Total liabilities 8,949,981 206,272 2,812,606 11,968,859
MINORITY INTEREST 5,256,065 - (2,628,032)(5) 2,628,033
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 1,994,804 and 3,413,053
shares issued and outstanding on historical 19,948 2,133 (3) 37 (9) 34,131
and pro-forma basis, respectively 12,013 (6)
Capital in excess of par value 17,806,708 2,183,782 (3) 11,208,081 (6) 31,297,512
70,750 (2)
(6,272)(4) 34,463 (9)
Accumulated distributions in excess of earnings (1,358,513) (2,385,915)(3) - (3,744,428)
Total shareholders' and partners' equity 16,468,143 (135,522) 11,254,594 27,587,215
Total liabilities and shareholders' and
partners' equity $30,674,189 $ 70,750 $ 11,439,168 $42,184,107
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-27
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser were completed on
March 31, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition
of the Partnership properties are based on the assumption
that the acquisitions are approved by 50% of the limited
partners and that 20% of these partners elect to take a note
in lieu of Company stock. All of the Partnership properties
have the same characteristics and, therefore, the 50%
assumption is provided to assist the reader in evaluating
various scenarios. The pro forma entries assume that the
Company will maintain control over the properties to be
acquired.
(2) Represents the addition of office furniture and equipment.
(3) Represents the issuance of 213,260 shares of Common Stock in
consideration for the acquisition of the Adviser at a price of
$10.25 per share, the selling price under the Company's current
offering, plus an estimated obligation to the shareholder of the
Adviser in the amount of $200,000 plus estimated transaction
costs of $465,000. This amount has been accounted for as costs
incurred in acquiring the Adviser from a related party because
the Adviser has not been deemed to quality as a "business" for
purposes of applying APB Opinion No. 16, "Business Combinations".
This adjustment does not include any shares potentially issuable
in accordance with the Agreement and Plan of Merger since the Pro
Forma Balance Sheet was prepared as if the merger occurred on
March 31, 1998 and the issuance of any additional shares is
dependent upon the achievement of events subsequent to the
closing of the merger. As of March 31, 1998, all of the $465,000
of transaction costs had been incurred and charged to expense.
Consideration for the Adviser $ 2,385,915
(to be expensed upon consummation of transaction)
Common Stock issued $ 2,133
Capital in excess of par value 2,183,782
Retained earnings (2,385,915)
Net decrease in equity $ 200,000
The $200,000 estimated obligation to the shareholder of the
Adviser represents the estimated excess current liabilities
over the current assets of the Adviser at the closing date
("Current Liability Excess"). This amount is payable at the
election of the Company in either cash or common stock valued
at a price of $10.25 per share. The remaining share balance
will be reduced by the number of shares equal to the Current
Liability Excess divided by $10.25.
In addition, up to 686,740 shares of stock valued at
$7,039,085 are contingently issuable for a period of up to 24
calendar quarters following the closing of the transaction.
Within 30 days after the end of each calendar quarter, shares
will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of
the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these
additional shares will be expensed as they are issued.
(4) Represents a capital lease obligation related to office
equipment.
F-28
(5) Represents adjustments for the purchase method of accounting
whereby the real estate owned by the Partnerships is
allocated based on the estimated fair market value and the
cash, receivables, payables and security deposits of the
Partnerships is recorded at book value, which approximates
its fair value, as follows:
Real Estate Other Total
Taylor Income Investors III, Ltd. $ 494,909 $ 15,998 $ 510,907
Taylor Income Investors IV, Ltd. 229,062 64,144 293,206
Taylor Income Investors V, Ltd. 162,483 53,759 216,242
Taylor Income Investors VI, Ltd. 148,473 (250) 148,223
AAA Net Realty Fund VII, Ltd. 470,164 14,422 484,586
AAA Net Realty Fund VIII, Ltd. 940,328 21,466 961,794
AAA Net Realty Fund Goodyear, Ltd. 519,655 17,041 536,696
AAA Net Realty Fund IX, Ltd. 2,449,802 34,236 2,484,038
AAA Net Realty Fund X, Ltd. 5,147,058 (11,594) 5,135,464
AAA Net Realty Fund XI, Ltd. 3,073,387 40,323 3,113,710
13,635,321 249,545 13,884,866
Less: Minority Interest 2,628,032 - 2,628,032
Net Adjustment $11,007,289 $ 249,545 $11,256,834
<TABLE>
(6) Represents the issuance of 1,201,295 shares of Company stock
valued at $11,220,094 based upon a per share price of $9.34
as follows:
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 116.92 378.00 44,197 $ 412,798
Taylor Income Investors IV, Ltd. 102.91 246.00 25,316 236,452
Taylor Income Investors V, Ltd. 97.21 192.00 18,665 174,333
Taylor Income Investors VI, Ltd. 106.89 120.00 12,826 119,799
AAA Net Realty Fund VII, Ltd. 92.22 450.00 41,501 387,617
AAA Net Realty Fund VIII, Ltd. 110.72 744.00 82,374 769,373
AAA Net Realty Fund Goodyear, Ltd. 86.08 534.00 45,969 429,352
AAA Net Realty Fund IX, Ltd. 99.68 2156.20 214,924 2,007,390
AAA Net Realty Fund X, Ltd. 97.00 4581.45 444,403 4,150,722
AAA Net Realty Fund XI, Ltd. 95.38 2824.49 269,406 2,516,256
Total Limited Partners 1,199,581 11,204,092
General Partners 1,714 16,002
Total 1,201,295 $11,220,094
(7) Represents estimated legal and professional fees, which will
be capitalized as acquisition costs.
(8) Represents notes to 20% of the limited partners in lieu of
Company stock payable at 95% of the fair value of the
Partnerships' net assets.
(9) Represents the issuance of 3,694 shares of the Company's
stock based upon a per share price of $9.34. The shares will be
acquired with cash by the Company's president.
F-29
</TABLE>
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (4) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $1,217,187 - $1,079,992 $2,297,179
Earned income from direct financing 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 12,418 166,313
TOTAL REVENUES 1,710,710 309,248 1,092,410 3,112,368
EXPENSES
General operating and administrative 112,464 76,913 26,855 216,232
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 270,404 431,850
Interest 6,000 18,202 159,887 184,089
Acquisition costs 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 457,146 1,001,461
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 635,264 2,110,907
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 227,613 (227,613)
PRO FORMA NET INCOME $ 538,857 $ 481,560 $ 862,877 $1,883,294
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.63
Diluted $ 0.33 $ 0.61
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 3,011,456
Diluted 1,624,217 3,072,625
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-30
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of January
1, 1997. The Partnership properties include the acquisition of a
minority interest in several joint ventures with the Company.
Pro forma adjustments from the acquisition of Partnership
properties are based on the assumption that the acquisitions are
approved by 50% of the limited partners and that 20% of the
partners elect to take a note in lieu of Company stock. The pro
forma entries assume that the Company will maintain control over
the properties to be acquired.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) To the extent that the consideration paid for the Adviser
exceeds the fair market value of the net tangible assets
received, an expense will be recorded as an operating expense on
the Company's Statement of Operations. Because the purpose of
the pro forma statement of operations is to reflect the expected
continuing impact of the merger on the Company, this adjustment
has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year
ended December 31, 1997, this pro forma expense would have been
$3,392,275 based on the issuance of 213,260 shares at closing on
January 1, 1997 and 120,636 additional shares issued during the
year in accordance with the partial satisfaction of the share
balance issuance criteria described in the Agreement and Plan of
Merger. Up to 686,740 shares of stock are contingently issuable
for a period of up to 24 calendar quarters following the closing
of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where
total shares issued to the shareholder of the Adviser pursuant to
the acquisition of the Adviser does not exceed 9.8% of the
Company's total shares then issued and outstanding. Based on the
pro forma financial statement 566,104 of the shares remain at
December 31, 1997. The issuance of these additional shares will
be expensed as they are issued.
Pro forma weighted average shares outstanding consists of
the historical weighted average shares outstanding of the
Company, the shares issued for both mergers on January 1,
1997 and 25% of the additional shares issued for the Adviser
during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o Interest expense on notes payable to certain limited
partners computed at 6% of the outstanding balance.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-31
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (3) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $ 436,009 - $ 286,013 $ 722,022
Earned income from direct financing leases 85,103 - - 85,103
Service fee income - 59,292 - 59,292
Interest income 19,782 - 5,170 24,952
TOTAL REVENUES 540,894 59,292 291,183 891,369
EXPENSES
General operating and administrative 68,793 64,778 6,714 140,285
Reimbursements and fees to related 17,660 - - 17,660
Amortization 15,688 8 - 15,696
Depreciation 56,949 4,713 67,601 129,263
Interest 26,895 199 39,971 67,065
Acquisition costs 182,322 (182,322) - -
TOTAL EXPENSES 368,307 (112,624) 114,286 369,969
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 172,587 171,916 176,897 521,400
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (135,359) - 67,680 (67,679)
PRO FORMA NET INCOME $ 37,228 $ 171,916 $ 244,577 $ 453,721
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.02 $ 0.13
Diluted $ 0.02 $ 0.13
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,926,132 3,465,017
Diluted 1,926,132 3,465,017
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-32
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the
Partnership properties and the Adviser was effective as of January
1, 1997. The Partnership properties include the acquisition of a
minority interest in several joint ventures with the Company.
Pro forma adjustments from the acquisition of Partnership
properties are based on the assumption that the acquisitions are
approved by 50% of the limited partners and that 20% of the
partners elect to take a note in lieu of Company stock. The pro
forma entries assume that the Company will maintain control over
the properties to be acquired.
(2) Includes pro forma adjustments as follows:
o Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
o Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) Includes pro forma adjustments as follows:
o Rental income is included from Partnership properties which
have not historically been consolidated by the Company. Certain
of the Partnerships' properties which are majority owned by the
Company are included in the historical financial information of
the Company.
o Interest income is included from temporary cash investments
and from a note receivable issued as part of the sale of a
Partnership property.
o Depreciation is included based upon the purchase price which
represents the fair market value of the properties over 33 years.
o Interest expense on notes payable to certain limited
partners computed at 6% of the outstanding balance.
o General and administrative expenses are included primarily
for legal and professional fees.
o The Partnership interest in certain properties which are
majority owned by the Company is eliminated as the historical
financial statements of the Company are reflected on a
consolidated basis.
F-33
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,295,473
Accounts receivable 38,046
Property:
Escrow deposits 11,000
Land 6,836,971
Land under development 750,000
Buildings 9,958,973
Construction in progress 8,343,617
25,900,561
Accumulated depreciation (398,221)
Total property 25,502,340
Net investment in direct financing leases 3,163,740
Other assets:
Prepaid acquisition costs 401,762
Accrued rental income 198,421
Organization costs, net of accumulated amortization of $239,361 74,407
Total other assets 674,590
TOTAL ASSETS $30,674,189
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 8,918,884
Accounts payable 16,047
Security deposit 15,050
TOTAL LIABILITIES 8,949,981
Minority interest 5,256,065
Commitments (Note 6)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued
Common stock, $.01 par value, 100,000,000 shares authorized,
1,994,804 shares issued and outstanding 19,948
Capital in excess of par value 17,806,708
Accumulated distributions in excess of earnings (1,358,513)
TOTAL SHAREHOLDERS' EQUITY 16,468,143
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,674,189
See Notes to Consolidated Financial Statements.
F-34
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(Unaudited)
Year to Date
1998 1997
Revenues:
Rental income from operating leases $436,009 $252,610
Earned income from direct financing leases 85,103 84,841
Interest income 19,782 29,528
Total revenues 540,894 366,979
Expenses:
General operating and administrative 68,793 31,544
Reimbursements and fees to related party 17,660 13,692
Interest 26,895 3,000
Depreciation 56,949 28,437
Amortization 15,688 15,688
Potential acquisition costs 182,322 -
Total expenses 368,307 92,361
Income before minority interest in net income of
consolidated joint ventures 172,587 274,618
Minority interest in net income of consolidated
joint ventures (135,359) (93,451)
Net income $ 37,228 $181,167
Basic earnings per share $ 0.02 $ 0.14
Diluted earnings per share $ 0.02 $ 0.13
Weighted average number of common shares
outstanding 1,926,132 1,305,192
Weighted average number of common shares
outstanding plus dilutive potential common shares 1,926,132 1,366,671
See Notes to Consolidated Financial Statements.
F-35
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(Unaudited)
Year to Date
1998 1997
Cash flows from operating activities:
Net income $ 37,228 $ 181,167
Adjustments to reconcile net income to net cash
flows from operating activities:
Amortization 15,688 15,688
Depreciation 56,949 28,437
Decrease in accounts receivable 86,554 5,119
Increase (decrease) in accounts payable (92,776) 3,409
Cash receipts from direct financing leases
less than income recognized (2,544) (2,284)
Decrease in escrow deposits, net of
minority interest partners 100 -
Increase in accrued rental income (30,242) (19,473)
Increase in minority interest 135,359 93,451
Net cash provided by operating activities 206,316 305,514
Cash flows from investing activities:
Acquisition of real estate:
Accounted for under the operating lease method (2,379,266) (1,999)
Construction in progress (1,352,257) -
Change in prepaid acquisition costs (29,076) (80,444)
Net cash used in investing activities (3,760,599) (82,443)
Cash flows from financing activities:
Proceeds from issuance of stock, net 1,142,674 1,373,907
Proceeds from notes payable 2,787,395 -
Distributions paid to shareholders (341,965) (227,386)
Distributions to minority interest partners (140,088) (94,713)
Net cash provided by financing activities 3,448,016 1,051,808
Net (decrease) increase in cash and cash equivalents (106,267) 1,274,879
Cash and cash equivalents at beginning of period 1,401,740 1,616,311
Cash and cash equivalents at end of period $ 1,295,473 $ 2,891,190
See Notes to Consolidated Financial Statements.
F-36
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Asset Advisers Trust, Inc. ("the Company") was
incorporated on August 17, 1993 as a Maryland corporation. The
initial issuance of 20,001 shares of stock for $200,010 was to
American Asset Advisers Realty Corporation ("AAA"). Commencing
March 17, 1994, the Company offered up to 2,000,000 additional
shares of common stock together with 1,000,000 warrants. The
warrants were exercisable at $9 per share until March 15,
1998. The offering period of the initial public offering
terminated on March 15, 1996 with 1,008,252 shares being
issued. On June 18, 1996, the Company commenced a follow-on
offering of up to 2,853,659 additional shares of its common
stock. The offering will terminate June 17, 1998, unless
terminated earlier. As of March 31, 1998, 966,551 shares in
this second offering were issued, bringing the total shares
issued and outstanding to 1,994,804 shares.
The Company was formed with the intention to qualify and to
operate as a real estate investment trust under federal tax
laws. The Company will acquire commercial and industrial
properties using invested and borrowed funds. AAA, a related
party, manages the selection, acquisition and supervision of
the operation of the properties.
The consolidated financial statements include the accounts of
American Asset Advisers Trust, Inc. and its six joint ventures
with related parties. The Company owns greater than 50% of
these joint ventures and exercises control over operations.
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized
when earned and expenses are reflected when incurred.
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
There has been no cash paid for income taxes during 1998 or
1997. For the three months ended March 31, 1998, the Company
paid interest of $153,503, of which $126,608 was capitalized
on properties under construction. There was no other cash paid
for interest during the first quarter of 1998 or 1997.
Real estate is leased to others on a net lease basis whereby
all operating expenses related to the properties including
property taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for
under the operating method or the direct financing method.
Under the operating lease method, the properties are recorded
at cost. Rental income is recognized ratably over the life of
the lease and depreciation is charged based upon the estimated
useful life of the property.
Under the direct financing lease method, properties are
recorded at their net investment. Unearned income is deferred
and amortized to income over the life of the lease so as to
produce a constant periodic rate of return.
Expenditures related to the development of real estate are
carried at cost plus capitalized carrying charges, acquisition
F-37
costs and development costs. Carrying charges, primarily
interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are
capitalized as part of construction in progress.
Management reviews its properties for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets, including accrued rental income, may not
be recoverable through operations. Management determines
whether an impairment in value occurred by comparing the
estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with
the carrying cost of the individual property. If an
impairment is indicated, a loss will be recorded for the
amount by which the carrying value of the asset exceeds its
fair value.
Buildings are depreciated using the straight-line method over
an estimated useful life of 39 years.
Organization costs incurred in the formation of the Company
are amortized on a straight-line basis over five years.
Issuance costs incurred in the raising of capital through the
sale of common stock are treated as a reduction of
shareholders' equity.
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it
meets all conditions specified by the Internal Revenue Code
for retaining its REIT status, including the requirement that
at least 95% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
The Company believes the carrying value of financial
instruments consisting of cash, cash equivalents, accounts
receivable and accounts and notes payable approximate their
fair value.
The accompanying unaudited financial statements have been
prepared in accordance with the instructions to Form 10-QSB
and do not include all of the disclosures required by
generally accepted accounting principles. The financial
statements reflect all normal and recurring adjustments which
are, in the opinion of management, necessary to present a fair
statement of results for the three month periods ended March
31, 1998 and March 31, 1997.
The financial statements of American Asset Advisers Trust,
Inc. contained herein should be read in conjunction with the
financial statements included in the Company's annual report
on Form 10-KSB for the year ended December 31, 1997.
2. RELATED PARTY TRANSACTIONS
AAA owns 20,001 shares of the Company's stock. The common
stock of AAA is wholly owned by the president and director of
the Company. In addition, the Company has entered into an
Omnibus Services Agreement with AAA whereby AAA provides
property acquisition, leasing, administrative and management
services for the Company. Reimbursements and fees of $17,660
and $13,692 were incurred and charged to expense for the first
quarter of 1998 and 1997, respectively.
F-38
AAA has incurred certain costs in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance
with the terms of the offering. Costs of $18,974 and $37,992
were incurred by AAA for the first quarter of 1998 and 1997,
respectively, in connection with the issuance and marketing of
the Company's stock. These costs are reflected as issuance
costs and are recorded as a reduction to capital in excess of
par value.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees
incurred in connection with locating, evaluating and selecting
properties and structuring and negotiating the acquisition of
properties are included in the basis of the properties.
Acquisition fees of $55,428 and $80,063 were incurred and paid
to AAA for the first quarter of 1998 and 1997, respectively.
Acquisition fees paid to AAA included $401,762 that was earned
prior to purchasing certain properties.
On August 8, 1997, the Company entered into a loan agreement
as the lender with AmReit Development Corp., an entity with
common management, in the amount of $2,247,254 for the purpose
of developing a property in Lake Jackson, Texas that was
acquired by the Company upon completion of the property. As
of March 31, 1998, the loan was repaid in full. The loan had
interest at the prime lending rate.
On October 16, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd., an entity with common
management. The joint venture was formed for the purchase of
a property, which is being operated as a Hollywood Video store
in Lafayette, Louisiana. The property was purchased on October
31, 1997 after the construction was completed. The Company's
interest in the joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd. The joint venture was formed for
the purchase of a property, which is being operated as a Just
For Feet retail store in Baton Rouge, Louisiana. The property
was purchased on June 9, 1997 after the construction was
completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company entered into a joint
venture with AAA Net Realty XI, Ltd. The joint venture was
formed for the purchase of a parcel of land in The Woodlands,
Texas upon which the tenant, Bank United, constructed a branch
bank building at its cost. At the termination of the lease
the improvements will be owned by the joint venture. The
Company's interest in the joint venture is 51%.
On April 5, 1996, the Company entered into a joint venture
with AAA Net Realty Fund XI, Ltd. and AAA Net Realty Fund X,
Ltd., entities with common management, for the purchase of a
property which is being operated as a Just For Feet retail
store in Tucson, Arizona. The property was purchased on
September 11, 1996 after the construction was completed. The
Company's interest in the joint venture is 51.9%.
On September 12, 1995, the Company entered into a joint
venture agreement with AAA Net Realty Fund XI, Ltd. for the
purchase of a property, which is being operated as a
Blockbuster Music Store in Wichita, Kansas. The Company's
interest in the joint venture is 51%.
3. NOTES PAYABLE
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement currently
bears interest at 2.00% over varying London Interbank Offered
Rates and it is being used to acquire additional properties.
As of March 31, 1998, $8,768,884 was outstanding under the
Amended Credit Agreement.
F-39
In addition, the Company has a note payable to its president
in the amount of $150,000 plus accrued interest totaling
$20,000 as of March 31, 1998. This note is unsecured, payable
upon demand and bears interest at 8%. Interest incurred on
this note was $3,000 in the first quarter of 1998 (which was
capitalized) and $3,000 in the first quarter of 1997.
4. MAJOR TENANTS
The following schedule summarizes rental income by lessee for
the three months ended March 31, 1998 and March 31, 1997:
Year to Date
1998 1997
Tandy Corporation $ 27,225 $ 27,225
America's Favorite Chicken Co. 24,566 24,482
Blockbuster Music Retail, Inc. 94,476 94,476
One Care Health Industries, Inc. 50,409 50,409
Just For Feet, Inc. 184,552 101,410
Bank United 39,449 39,449
Hollywood Entertainment Corp. 72,137 -
OfficeMax, Inc. 28,298 -
$521,112 $337,451
5. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net
income by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by
dividing net income (as adjusted) by the weighted average
number of common shares outstanding plus dilutive potential
common shares.
6. COMMITMENTS
At March 31, 1998, the Company is committed to incur
additional costs of approximately $760,000 in connection with
properties under development.
At a special meeting of the Company's Board of Directors held
on December 31, 1997, the Board of Directors, other than Mr.
H. Kerr Taylor, who abstained from the vote due to his
interest in the transaction, approved the Company's becoming a
self-managed REIT through the acquisition of AAA. In pursuing
this acquisition, the Company will incur additional costs of
approximately $100,000. Such costs incurred in 1998 of
$182,322 were charged to expense. If approved by the
shareholders and consummated, the Company will initially issue
213,260 shares. The fair market value of the shares paid in
consideration will be charged to expense. In addition, the
Company may issue 686,740 additional shares upon the
achievement of certain goals. The fair market value of such
shares will be charged to expense.
F-40
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company was organized on August 17, 1993 to acquire, either
directly or through joint venture arrangements, undeveloped,
newly constructed and existing net-lease real estate that is
located primarily on corner or out-parcel locations in strong
commercial corridors, to lease on a net-lease basis to tenants
having a minimum net worth of $40 million and to hold the
properties with the expectation of equity appreciation producing
a steadily rising income stream for its shareholders.
AAA has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000
Issue. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the
year 2000. AAA's hardware and software are believed to be Year
2000 compliant. Accordingly, the Company does not expect to incur
any material costs in connection with the compliance of the Year
2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
The initial issuance of 20,001 shares of stock for $200,010 was
to AAA. On March 17, 1994, the Company commenced an offering of
2,000,000 Shares of Common Stock, together with 1,000,000
Warrants (collectively "Securities"). Until the completion of the
offering in March 1996, the Securities were offered on the basis
of two (2) Shares of Common Stock and one (1) Warrant for a total
purchase price of $20.00. The Shares and Warrants are separately
transferable by an investor. Each Warrant entitled the holder to
purchase one Share for $9.00 until March 15, 1998. The offering
period for the initial public offering terminated on March 15,
1996 with gross proceeds totaling $10,082,520 (1,008,252 shares).
On June 18, 1996, the Company commenced a follow-on offering of
up to $29,250,000 (2,853,659 shares) of additional shares of its
common stock. The offering will terminate June 17, 1998 unless
terminated earlier. As of March 31, 1998, gross proceeds had
been received for $9,838,388 (966,551 shares) in this second
offering bringing the total gross proceeds to $20,120,918
(1,994,804 shares).
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement currently bears
interest at 2.00% over varying London Interbank Offered Rates and
it is being used to acquire additional properties. As of March
31, 1998, $8,768,884 was outstanding under the Amended Credit
Agreement. These funds were advanced to third parties and
entities with common management to develop properties that will
be acquired by the Company upon completion.
The Company has an investment strategy of acquiring properties
and leasing them under net-leases to corporations having a
minimum net worth of $40 million, which strategy minimizes the
Company's operating expenses. The Company believes that the
leases will continue to generate cash flow in excess of operating
expenses. Due to low operating expenses and ongoing cash flow,
the Company does not believe that large working capital reserves
are necessary at this time. In addition, because all leases of
the Company's Properties are and are intended to continue to be
on a net-lease basis, it is not anticipated that a large reserve
for maintenance and repairs will be necessary. The Company
intends to distribute a significant portion of its funds from
operations unless it becomes necessary to maintain additional
reserves.
F-41
As of March 31, 1998, the Company had acquired seven Properties
directly and five Properties through joint ventures with entities
with common management and had invested $14,649,515, exclusive of
any minority interests, including certain acquisition expenses
related to the Company's investment in these properties. These
expenditures resulted in a corresponding decrease in the
Company's liquidity.
Until the Company acquires Properties, proceeds are held in
short-term, highly liquid investments that the Company believes
to have appropriate safety of principal. This investment strategy
has allowed, and continues to allow, high liquidity to facilitate
the Company's use of these funds to acquire properties at such
time as properties suitable for acquisition are located. At
March 31, 1998, the Company's cash and cash equivalents totaled
$1,295,473.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to
inflation as well as increases in the Consumer Price Index
(C.P.I.), may contribute to capital appreciation of the Company
Properties. These factors, however, also may have an adverse
impact on the operating margins of the tenants of the Properties.
FUNDS FROM OPERATIONS
Funds from operations (FFO) increased $66,895 or 32% to $276,499
for the three month period ended March 31, 1998 from $209,604 for
the three month period ended March 31, 1997. The Company has
adopted the National Association of Real Estate Investment Trusts
(NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting
principles) excluding gains or losses from sales of property,
depreciation and amortization of real estate assets, and
nonrecurring items of income or expense. For purposes of the
table below, FFO excludes the nonrecurring potential acquisition
costs. FFO is generally considered by industry analysts to be the
most appropriate measure of performance and does not necessarily
represent cash provided by operating activities in accordance
with generally accepted accounting principles and are not
necessarily indicative of cash available to meet cash needs.
Management considers FFO an appropriate measure of performance of
an equity REIT because it is predicated on cash flow analysis.
The Company's computation of FFO may differ from the methodology
for calculating FFO utilized by other equity REIT's and,
therefore, may not be comparable to such other REIT's. FFO is
not defined by generally accepted accounting principles and
should not be considered an alternative to net income as an
indication of the Company's performance.
Below is the reconciliation of net income to funds from operations for
the three months ended March 31:
1998 1997
Net income $ 37,228 $ 181,167
Plus depreciation 56,949 28,437
Plus potential acquisition costs 182,322 -
Total funds from operations $ 276,499 $ 209,604
Cash flows from operating activities, investing activities, and
financing activities for the three months ended March 31 are
presented below:
1998 1997
Operating activities $ 206,316 $ 305,514
Investing activities $(3,760,599) $ (82,443)
Financing activities $ 3,448,016 $ 1,051,808
F-42
RESULTS OF OPERATIONS
During the three months ended March 31, 1998 and March 31, 1997,
the Company owned and leased 12 and 8 properties, respectively.
During the three months ended March 31, 1998 and March 31, 1997,
the Company earned $521,112 and $337,451, respectively, in rental
income from operating leases and earned income from direct
financing leases. This 54 percent increase in rental income and
earned income is primarily attributable to rental income earned
on the four additional properties owned during 1998.
During the three months ended March 31, 1998 and March 31, 1997,
the Company's expenses were $368,307 and $92,361, respectively.
The $275,946 increase in expenses is primarily attributable to
$182,322 of costs incurred during the first quarter of 1998
related to potential acquisition costs related to the proposed
acquisition of the Company's adviser. The increase is also
attributable to (I) a $37,249 increase in general operating and
administrative expenses primarily attributable to an increase in
legal fees and director fees, and (ii) a $28,512 increase in
depreciation as a result of the depreciation of the additional
properties owned during 1998, and (iii) a $23,895 increase in
interest expense as a result of higher average borrowing levels.
F-43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Asset Advisers Trust, Inc.
We have audited the accompanying consolidated balance sheet of
American Asset Advisers Trust, Inc. (the "Company") as of
December 31, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index.
These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 10, 1998
F-44
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash and cash equivalents $ 1,401,740
Accounts receivable 124,600
Property:
Escrow deposits 11,100
Land 6,379,675
Land under development 750,000
Buildings 8,037,003
Construction in progress 6,991,360
22,169,138
Accumulated depreciation (341,272)
Total property 21,827,866
Net investment in direct financing leases 3,161,196
Other assets:
Prepaid acquisition costs 372,686
Accrued rental income 168,179
Organization costs, net of accumulated amortization
OF $223,672 90,096
Total other assets 630,961
TOTAL ASSETS $27,146,363
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 6,131,489
Accounts payable 108,823
Security deposit 15,050
TOTAL LIABILITIES 6,255,362
Minority interest 5,260,795
Commitments (Note 10)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued
Common stock, $.01 par value, 100,000,000 shares
authorized, 1,868,213 shares issued and outstanding 18,682
Capital in excess of par value 16,665,300
Accumulated distributions in excess of earnings (1,053,776)
TOTAL SHAREHOLDERS' EQUITY 15,630,206
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $27,146,363
See Notes to Consolidated Financial Statements.
F-45
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996
Revenues:
Rental income from operating leases $1,217,187 $ 780,768
Earned income from direct financing leases 339,628 144,020
Interest income 153,895 137,528
Total revenues 1,710,710 1,062,316
Expenses:
General operating and administrative 112,464 84,414
Reimbursements and fees to related party 106,504 37,910
Interest 6,000 5,000
Depreciation and amortization 208,769 175,533
Potential acquisition costs 282,890 -
Total expenses 716,627 302,857
Income before minority interest in net income of
consolidated joint ventures 994,083 759,459
Minority interest in net income of consolidated
joint ventures (455,226) (216,652)
Net income to common shareholders $ 538,857 $ 542,807
Basic earnings per share $ 0.34 $ 0.51
Diluted earnings per share $ 0.33 $ 0.48
Weighted average number of common shares outstanding 1,563,048 1,066,353
Weighted average number of common shares outstanding
plus dilutive potential common shares 1,624,217 1,127,832
See Notes to Consolidated Financial Statements.
F-46
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
Accumulated
Capital in distributions
Common Stock excess of in excess of
Number Amount par value earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 827,876 $ 8,279 $ 7,438,368 $ (304,724) $ 7,141,923
Net income - - - 542,807 542,807
Distributions ($.71 per share) - - - (737,277) (737,277)
Issuance of common stock 377,049 3,770 3,810,883 - 3,814,653
Stock issuance costs - - (468,404) - (468,404)
Balance at December 31, 1996 1,204,925 12,049 10,780,847 (499,194) 10,293,702
Net income - - - 538,857 538,857
Distributions ($.72 per share) - - - (1,093,439) (1,093,439)
Issuance of common stock 663,288 6,633 6,783,642 - 6,790,275
Stock issuance costs - - (899,189) - (899,189)
Balance at December 31, 1997 1,868,213 $18,682 $16,665,300 $ (1,053,776) $15,630,206
See Notes to Consolidated Financial Statements.
</TABLE>
F-47
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996
Cash flows from operating activities:
Net income $ 538,857 $ 542,807
Adjustments to reconcile net income to net cash
flows from operating activities:
Amortization 62,754 61,789
Depreciation 146,015 113,744
Increase in accounts receivable (119,481) (5,119)
Increase (decrease) in accounts payable 72,588 (31,246)
Cash receipts from direct financing leases
greater (less) than income recognized (9,398) 1,017
Decrease (increase) in escrow deposits, net of
minority interest partners 27,150 (38,250)
Increase in accrued rental income (93,554) (50,780)
Increase in minority interest 455,226 216,652
Net cash provided by operating activities 1,080,157 810,614
Cash flows from investing activities:
Acquisition of real estate:
Accounted for under the operating lease method (3,668,365) (1,695,146)
Accounted for under the direct financing lease - (1,342,805)
Land under development (750,000) -
Construction in progress (6,991,360) -
Change in prepaid acquisition costs (298,350) 3,425
Net cash used in investing activities (11,708,075) (3,034,526)
Cash flows from financing activities:
Proceeds from issuance of stock, net 5,891,086 3,346,249
Prepaid issuance costs 101,399 (101,399)
Proceeds from note payable 5,981,489 -
Distributions paid to shareholders (1,093,439) (737,277)
Distributions to minority interest partners (467,188) (232,311)
Net cash provided by financing activities 10,413,347 2,275,262
Net (decrease) increase in cash and cash
equivalents (214,571) 51,350
Cash and cash equivalents at beginning of year 1,616,311 1,564,961
Cash and cash equivalents at end of year $ 1,401,740 $1,616,311
Supplemental disclosure of non-cash financing
activities:
Real estate and escrow deposit contributed by
partners of the consolidated joint ventures
(minority interest) $ 1,677,659 $2,051,337
See Notes to Consolidated Financial Statements.
F-48
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Asset Advisers Trust, Inc. ("the Company") was
incorporated on August 17, 1993 as a Maryland corporation. The
initial issuance of 20,001 shares of stock for $200,010 was to
American Asset Advisers Realty Corporation ("AAA"). Commencing
March 17, 1994, the Company offered up to 2,000,000 additional
shares of common stock together with 1,000,000 warrants. The
warrants were exercisable at $9 per share between March 17,
1997 and March 15, 1998. As of December 31, 1997, 501,583
warrants were outstanding. The offering period of the initial
public offering terminated on March 15, 1996 with 1,008,252
shares being issued. On June 18, 1996, the Company commenced a
follow-on offering of up to 2,853,659 additional shares of its
common stock. The offering will terminate June 17, 1998 unless
terminated earlier. As of December 31, 1997, 839,960 shares in
this second offering were issued, bringing the total shares
issued and outstanding to 1,868,213 shares.
The Company was formed to acquire commercial and industrial
real estate properties using invested and borrowed funds. The
selection, acquisition and supervision of the operation of the
properties are managed by AAA, a related party.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
American Asset Advisers Trust, Inc. and its six joint ventures
with related parties. The Company owns greater than 50% of
these joint ventures and exercises control over operations.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized
when earned and expenses are recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds.
REAL ESTATE
Real estate is leased to others on a net lease basis whereby
all operating expenses related to the properties, including
property taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for
under the operating lease method or the direct financing lease
method.
F-49
Under the operating lease method, the properties are recorded
at cost. Rental income is recognized ratably over the life of
the lease and depreciation is charged based upon the estimated
useful life of the property. Under the direct financing lease
method, properties are recorded at their net investment (see
Note 3). Unearned income is deferred and amortized to income
over the life of the lease so as to produce a constant periodic
rate of return.
Expenditures related to the development of real estate are
carried at cost plus capitalized carrying charges, acquisition
costs and development costs. Carrying charges, primarily
interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are
capitalized as part of construction in progress. Interest of
$132,950 was capitalized on properties under construction
during 1997.
The Company obtains an appraisal on each property prior to a
property's acquisition and also performs an annual valuation
update to evaluate potential impairment for each property for
which an appraisal is older than twelve months. This valuation
is based on capitalization of income for each property, a
review of current market conditions and any significant events
or factors which would indicate a potential impairment to the
value of a property.
DEPRECIATION
Buildings are depreciated using the straight-line method over
an estimated useful life of 39 years.
ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are
amortized on a straight-line basis over five years.
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the
sale of common stock are treated as a reduction of
shareholders' equity.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
No cash was paid for interest during 1997 or 1996.
FEDERAL INCOME TAXES
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it
meets all conditions specified by the Internal Revenue Code for
retaining its REIT status, including the requirement that at
least 95% of its real estate investment trust taxable income is
distributed by March 15 of the following year.
F-50
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net
income to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share has been
computed by dividing net income to common shareholders (as
adjusted) by the weighted average number of common shares
outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate
basic and diluted earnings per share for the periods indicated,
with 1996 being restated to conform with the requirements of
the Statement of Financial Accounting Standards No. 128,
Earnings Per Share, described below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 1,563,048 1,066,353
Basic earnings per share $ .34 $ .51
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding 1,563,048 1,066,353
Shares issuable from assumed conversion of warrants 61,169 61,479
Weighted average common shares outstanding, as adjusted 1,624,217 1,127,832
Diluted earnings per share $ .33 $ .48
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income to common shareholders (basic and diluted
earnings per share computation) $ 538,857 $ 542,807
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying value of financial
instruments consisting of cash, cash equivalents, accounts
receivable and accounts and notes payable approximate their
fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was
effective for periods ending after December 15, 1997, specifies
the computation, presentation and disclosure requirements of
earnings per share and supercedes Accounting Principles Board
Opinion No. 15. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share,
which excludes the impact of common share equivalents, replaces
primary earnings per share. Diluted earnings per share, which
utilizes the average market price per share as opposed to the
F-51
greater of the average market price per share or ending market
price per share when applying the treasury stock method in
determining common share equivalents, replaces fully diluted
earnings per share.
In February 1997, the FASB also issued SFAS No. 129, Disclosure
of Information about Capital Structure, which establishes
standards for disclosing information about an entity's capital
structure. SFAS No. 129 was effective for periods ending after
December 15, 1997. The adoption of SFAS No. 129 did not impact
the Company's capital structure disclosures as the Company was
already in compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 130
establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments and
related information in interim and annual financial statements.
SFAS No. 131 will not impact the Company's financial statements
as it reports as a single segment. SFAS Nos. 130 and 131 are
effective for periods beginning after December 15, 1997.
Management is evaluating what, if any, additional disclosures
or reporting may be required upon the implementation of SFAS
No. 130.
2. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals,
under noncancellable operating leases in existence at December
31, 1997 is as follows:
1998 $ 1,510,662
1999 $ 1,536,879
2000 $ 1,561,707
2001 $ 1,570,744
2002 $ 1,605,727
2003-2016 $ 11,005,543
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at
December 31, 1997 included:
Minimum lease payments receivable $ 7,110,814
Unguaranteed residual value 1,557,904
Less: Unearned income 5,507,522
$ 3,161,196
A summary of minimum future rentals, exclusive of any renewals,
under the noncancellable direct financing leases are summarized
as follows:
1998 $ 330,229
1999 $ 333,165
2000 $ 336,590
2001 $ 343,251
2002 $ 363,233
2003-2016 $ 5,404,346
F-52
4. CONSOLIDATED JOINT VENTURES
The Company consolidates all of its joint ventures due to its
ability to control operations.
On October 16, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd., an entity with common management.
The joint venture was formed for the purchase of a property,
which is being operated as a Hollywood Video store in
Lafayette, Louisiana. The property was purchased on October 31,
1997 after the construction was completed. The Company's
interest in the joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd. The joint venture was formed for
the purchase of a property, which is being operated as a Just
For Feet retail store in Baton Rouge, Louisiana. The property
was purchased on June 9, 1997 after the construction was
completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company formed a joint venture, AAA
Joint Venture 96-2, with AAA Net Realty Fund XI, Ltd. The
joint venture was formed for the purpose of acquiring a parcel
of land in The Woodlands, Texas upon which the tenant, Bank
United, constructed a branch bank building at its cost. At the
termination of the lease the improvements will be owned by the
joint venture. The Company's interest in the joint venture is
51%.
On April 5, 1996, the Company formed a joint venture, AAA Joint
Venture 96-1, with AAA Net Realty Fund XI, Ltd. and AAA Net
Realty Fund X, Ltd., entities with common management, for the
purpose of acquiring a property which is being operated as a
Just For Feet retail store in Tucson, Arizona. The property
was purchased on September 11, 1996 after construction was
completed. The Company's interest in the joint venture is
51.9%.
On September 12, 1995, the Company formed a joint venture, AAA
Joint Venture 95-2, with AAA Net Realty Fund XI, Ltd. for the
purpose of acquiring a property in Wichita, Kansas on lease to
Blockbuster Music Retail, Inc. The Company's interest in the
joint venture is 51%.
On October 27, 1994, the Company formed a joint venture, AAA
Joint Venture 94-1, with AAA Net Realty Fund X, Ltd. for the
purpose of acquiring a property in Independence, Missouri on
lease to Blockbuster Music Retail, Inc. The Company's interest
in the joint venture is 54.84%.
5. NOTES PAYABLE
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement currently
bears interest at 2.00% over varying London Interbank Offered
Rates and it is being used to acquire additional properties.
As of December 31, 1997, $5,981,489 was outstanding under the
Amended Credit Agreement.
In addition, the Company has a note payable to its president in
the amount of $150,000 plus accrued interest totaling $17,000
as of December 31, 1997. This note is unsecured, payable upon
demand and bears interest at 8%. Interest incurred on this
note was $12,000 in 1997 (of which $6,000 was capitalized) and
$5,000 in 1996.
F-53
6. MAJOR TENANTS
The Company's operations are related to the acquisition and
leasing of commercial real estate properties. The following
schedule summarizes rental income by lessee for 1997 and 1996
under both operating lease and direct financing lease methods
of accounting:
1997 1996
Tandy Corporation (Mesquite, Texas) $ 108,900 $ 108,900
America's Favorite Chicken Company (Smyrna, Georgia) 97,931 91,875
Blockbuster Music Retail, Inc. (Independence, Missouri
and Wichita, Kansas) 377,901 377,901
OneCare Health Industries, Inc. (Houston, Texas) 201,638 201,638
Just For Feet, Inc. (Tucson, Arizona and Baton Rouge,
Louisiana) 590,192 123,244
Bank United (The Woodlands, Texas and Houston, Texas) 157,801 21,230
Hollywood Entertainment Corp. (Lafayette, Louisiana and
Ridgeland, Mississippi) 22,452 -
Total $1,556,815 $ 924,788
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting
purposes and taxable income before distribution deductions
relate primarily to temporary differences and to certain
organization costs which are amortized for financial reporting
purposes only.
For income tax purposes, distributions paid to shareholders
consist of ordinary income, capital gains and return of capital
as follows:
1997 1996
Ordinary Income $ 795,918 $ 545,967
Capital gains - -
Return of capital 297,521 191,310
$ 1,093,439 $ 737,277
8. RELATED PARTY TRANSACTIONS
AAA owns 20,001 shares of the Company's stock. The common
stock of AAA is wholly owned by the president and director of
the Company. In addition, the Company has entered into an
Omnibus Services Agreement with AAA whereby AAA provides
property acquisition, leasing, administrative and management
services for the Company. Reimbursements and fees of $106,504
and $37,910 were incurred and charged to expense in 1997 and
1996, respectively.
F-54
AAA has incurred certain costs in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance
with the terms of the offering. Costs of $164,985 and $98,494
were incurred by AAA in 1997 and 1996, respectively, in
connection with the issuance and marketing of the Company's
stock. These costs are reflected as issuance costs and are
recorded as a reduction to capital in excess of par value.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees incurred
in connection with locating, evaluating and selecting
properties and structuring and negotiating the acquisition of
properties are included in the basis of the properties.
Acquisition fees of $1,059,805 and $222,785 were incurred and
paid to AAA during 1997 and 1996, respectively. Acquisition
fees paid to AAA in 1997 included $372,686 that was earned
prior to purchasing certain properties.
On August 8, 1997, the Company entered into a loan agreement as
the lender with AmReit Development Corp., an entity with common
management, in the amount of $2,247,254 for the purpose of
developing a property in Lake Jackson, Texas that will be
acquired by the Company upon completion of the property. As of
December 31, 1997, $1,928,974 was outstanding on the loan. The
loan bears interest at the prime lending rate and matures on
May 1, 1998.
On September 18, 1997, the Company entered into a loan
agreement as the lender with Centurion Video, Ltd. in the
amount of $1,153,794 for the purpose of developing a property
in Ridgeland, Mississippi that was acquired by the Company upon
completion of the property. AAA Net Developers, Ltd., an
entity with common management, was the limited partner in
Centurion Video, Ltd. As of December 31, 1997, the loan was
repaid in full. The loan had interest at the prime lending rate
plus .5%.
See Note 4 for joint venture agreements with related parties.
9. PROPERTY ACQUISITIONS IN 1997
On December 30, 1997, the Company acquired a newly constructed
property on lease to Hollywood Entertainment Corporation for
the purchase price of $1,285,854. The property is being
operated as a Hollywood Video store in Ridgeland, Mississippi.
The lease agreement extends for fifteen years, however the
tenant has the option to renew the lease for four additional
terms of five years each. The lease has provisions for an
escalation in the rent after the fifth year of the lease. The
Company did not record any income from Hollywood Entertainment
Corporation in 1997 related to this property.
On October 31, 1997, the Company acquired a 74.58% interest in
a newly constructed property on lease to Hollywood
Entertainment Corporation through a joint venture with an
entity with common management for the purchase price of
$863,407. The property is being operated as a Hollywood Video
store in Lafayette, Louisiana. The lease agreement extends for
fifteen years, however the tenant has the option to renew the
lease for four additional terms of five years each. The lease
has provisions for an escalation in the rent after the fifth
year of the lease. The Company recorded $22,452 of income from
Hollywood Entertainment Corporation in 1997.
On June 9, 1997, the Company acquired a 51% interest in a newly
constructed property on lease to Just For Feet, Inc. through a
joint venture with an entity with common management for the
purchase price of $1,517,005. The property is being operated
as a Just For Feet retail store in Baton Rouge, Louisiana. The
F-55
lease agreement extends for fifteen years, however the tenant
has the option to renew the lease for two additional terms of
five years each. The lease has provisions for an escalation in
the rent after the fifth and tenth years of the lease. The
Company recorded $184,296 of income from this Just For Feet
location in 1997.
As no buildings had previously been constructed on any of the
properties acquired by the Company during 1997, the rental
income received by the Company from these properties represents
the initial results of operations. Consequently, no pro-forma
information is presented.
10. COMMITMENTS
At December 31, 1997, the Company is committed to incur
additional costs of approximately $3,880,000 in connection with
properties under development.
At a special meeting of the Company's Board of Directors held
on December 31, 1997, the Board of Directors, other than Mr. H.
Kerr Taylor, who abstained from the vote due to his interest in
the transaction, approved the Company's becoming a self-managed
REIT through the acquisition of AAA. In pursuing this
acquisition, the Company will incur additional costs of
approximately $100,000. Such costs incurred in 1997 of
$282,890 were charged to expense. If approved by the
shareholders and consummated, the Company will initially issue
213,260 shares. The fair market value of the shares paid in
consideration will be charged to expense. In addition, the
Company may issue 686,740 additional shares upon the
achievement of certain goals. The fair market value of such
shares will be charged to expense.
F-56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AmREIT
(formerly American Asset Advisers Trust, Inc.)
We have audited the accompanying combined statements of revenues
and certain expenses (defined as being operating revenues less
direct operating expenses) of real estate properties anticipated
to be acquired (as disclosed at Note 1 of the combined statement
of revenues and certain expenses) (the "Acquired Properties") for
the years ended December 31, 1997 and 1996. These combined
financial statements are the responsibility of the management of
the Acquired Properties. Our responsibility is to express an
opinion on the combined statements of revenues and certain
expenses based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the combined statements of revenues and certain expenses are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
combined statements of revenues and certain expenses. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the combined statements of revenues
and certain expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying combined statements of revenues and certain
expenses were prepared for the purpose of inclusion in a proxy
statement to be filed on Schedule 14A of AmREIT. Material
amounts, described in Note 1 to the combined statements of
revenues and certain expenses, that would not be comparable to
those resulting from the proposed future operations of the
properties are excluded and the statements are not intended to be
a complete presentation of the revenues and expenses of these
properties.
In our opinion, such combined statements of revenues and certain
expenses presents fairly, in all material respects, the combined
revenues and certain expenses, as defined above, of the various
real estate properties (as disclosed at Note 1 of the combined
statements of revenues and certain expenses) for the years ended
December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 27, 1998
F-57
<TABLE>
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF REAL ESTATE PROPERTIES ANTICIPATED TO BE ACQUIRED
<CAPTION>
Years ended Three months ended
December 31, March 31,
1997 1996 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating
leases $ 2,089,958 $ 2,059,305 $ 554,431 $ 514,736
Earned income from direct
financing leases 70,026 63,727 17,594 17,505
TOTAL REVENUES 2,159,984 2,123,032 572,025 532,241
EXPENSES
Property expenses 3,368 5,405 5,400 1,396
TOTAL EXPENSES 3,368 5,405 5,400 1,396
REVENUES IN EXCESS OF
CERTAIN EXPENSES $ 2,156,616 $ 2,117,627 $ 566,625 $ 530,845
See Notes to Financial Statements
</TABLE>
F-58
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
REAL ESTATE PROPERTIES ANTICIPATED TO BE ACQUIRED
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Note 1-Description and summary of significant accounting policies
Description
The operations of the following Acquired Properties are included
in the accompanying combined statements for the years ended
December 31, 1997 and 1996:
Steak and Ale (Houston, TX) Goodyear Tire (Carrollton, TX)
Bank of America (Houston, TX) Foodmaker - JackIn The Box (Dallas, TX)
Taco Bell (Houston, TX) Baptist Memorial Health (Memphis, TN)
Pizza Inn (Clute, TX) Payless Shoes - WaldenBooks (Austin, TX)
Whataburger (Clute, TX) Golden Corral (Houston, TX)
La Petite Academy (Houston, TX) Golden Corral (Humble, TX)
Whataburger (Dallas, TX) TGI Friday's (Houston, TX)
Arandas Bakery (Houston, TX) Goodyear Tire (Houston, TX)
AFC, Inc. - Church's (Houston, TX) Computer City (Minnesota, MN)
Gannett - Billboard (Houston, TX) AFC, Inc. - Popeye's (Atlanta, GA)
Discount Tire (Fort Worth, TX) OneCare Health (Sugar Land, TX)
La Petite Academy (Houston, TX) Blockbuster Video (Oklahoma City, OK)
Goodyear Tire (Dallas, TX) Pier One Imports (Longmont, CO)
Basis of presentation
The accompanying financial statements are presented on a combined
basis because the partnerships owning the properties have a
common general partner and are under common management. Each of
the properties are managed by an entity which was previously
owned by the chairman, president and 10.6% shareholder of
American Asset Advisers Trust, Inc. (the "Company"). On June 5,
1998, the entity merged into the Company. The chairman is also
the general partner or a majority shareholder of the corporate
general partner of the partnerships that currently own the
properties.
The accompanying historical financial statement information is
presented in conformity with Rule 3-14 of the Securities and
Exchange Commission. Accordingly, the accompanying combined
financial statements include only expenses directly related to
the operations of the properties. Expenses not directly related
to the future operations of the properties, such as depreciation,
amortization, management fees and professional fees, are not
included in the accompanying combined financial statements.
F-59
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Operating revenues are presented on the accrual basis of
accounting. Rental income is recognized ratably over the life of
the lease. Lease agreements do not provide for contingent
rentals.
Interim Financial Statements
In the opinion of management all adjustments necessary for a fair
presentation of such interim unaudited financial statements have
been included. Such adjustments consisted of normal recurring
items. Interim results are not necessarily indicative of results
for a full year.
Note 2-Operating leases
A summary of minimum future rentals, exclusive of any renewals,
under non-cancelable operating leases in existence at December
31, 1997 is as follows:
1998 $ 2,164,822
1999 2,154,980
2000 2,045,111
2001 1,998,380
2002 1,927,203
2003-2016 7,921,351
$18,211,847
Note 3-Major tenants
Following is a summary of rental income by lessee for 1997 and
1996 who have contributed 10% or more of the total revenues:
Tenant 1997 1996
Golden Corral Corporation $364,676 $364,676
Tandy Corporation $366,516 $421,464
F-60
Annex Volume
Table of Contents
Form of Agreement and Plan of Merger . . . . . . . . . . .Annex 1
Form of Amendment to Partnership Agreement . . . . . . . .Annex 2
Forms of the Note and Loan Agreement . . . . . . . . . . .Annex 3
Form of Bishop-Crown Fairness Opinion. . . . . . . . . . .Annex 4
Form of Houlihan Fairness Opinion. . . . . . . . . . . . .Annex 5
Consent Forms and Letter of Instructions . . . . . . . . .Annex 6
Form of
AGREEMENT AND PLAN OF MERGER
ANNEX 1
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of ____________, 1998, is entered into by and between AmREIT,
Inc., a Maryland real estate investment trust (the "REIT"), and
[Name of Partnership], a Texas [Nebraska] limited partnership
(the "Partnership"). [H. Kerr Taylor, on behalf of [himself as
the individual General Partner and] [name of corporate General
Partner], a Texas [Nebraska] corporation, the General Partner[s]
of the Partnership (referred to herein as the "General Partner"),
is a party to this Agreement solely for the purpose of binding
itself to the provisions of Section 5 and Section 7.9, hereunder.
RECITALS
A. The Board of Directors of the REIT (the "Board of
Directors" or the "Board") and the General Partner of the
Partnership have each determined that a business combination
between the REIT and the Partnership is in the best interests of
their shareholders and partners, respectively, and presents an
opportunity for their respective businesses to achieve strategic
and financial benefits, and accordingly have agreed to effect a
merger subject to the terms and conditions set forth herein.
B. The REIT and the Partnership desire to make certain
representations, warranties and agreements in connection with the
merger.
NOW, THEREFORE, in consideration of the foregoing, and of
the representations, warranties, covenants and agreements
contained herein, the REIT and the Partnership hereby agree as
follows:
SECTION 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of
this Agreement, at the Effective Time (as defined in Section
1.3), the Partnership shall be merged with and into the REIT in
accordance with this Agreement and the Plan of Merger (the "Plan
of Merger"), with such completions, additions and substitutions
conforming to the terms of this Agreement as the parties shall
approve, such approval to be conclusively evidenced by their
causing the Plan of Merger containing such completions, additions
or substitutions to be filed in accordance with applicable laws.
The separate existence of the Partnership shall thereupon cease
(the "Merger"). The REIT shall be the surviving entity in the
Merger (sometimes hereinafter referred to as the "Survivor"). The
Merger shall have the effects specified in the Maryland General
Corporations Act, as amended (the "Maryland Act") and Section
2.11 of the Texas [Nebraska] Revised Uniform Limited Partnership
Act (the "LP Act").
1.2 The Closing. Subject to the terms and conditions of
this Agreement, the closing of the Merger (the "Closing") shall
take place at the offices of the REIT, located at Eight Greenway
Plaza, Suite 824, Houston, Texas 77046 at ________, ___.m., local
time, within five business days after receipt of approval of the
Merger by the REIT's shareholders and the Partnership's partners
(the "Partners"), or at such other time, date or place as the
REIT and the Partnership may agree. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set
forth in Section 8 shall have been fulfilled or waived (and this
Agreement shall not have been terminated as provided in Section
9), the REIT and the Partnership shall cause Articles of Merger
satisfying the requirements of the Maryland Act and Articles of
Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with
the LP Act and the Maryland Act on the Closing Date. The Merger
shall become effective for accounting and all other purposes to
the fullest extent permitted by law as of the close of business
on the date on which approval of the Merger by the REIT's
shareholders and the Partners, whichever is the last to occur
(the "Effective Time") or such other date as may be agreed to by
the parties, but not later than the Closing Date. For state law
purposes, the Merger shall become effective upon the issuance of
a certificate of merger by the Secretary of State of the State of
Texas [Nebraska] in accordance with the LP Act or at such later
time which the REIT and the Partnership shall have agreed upon
and designated in such filings in accordance with applicable law.
SECTION 2
THE SURVIVING CORPORATION
2.1 Surviving Corporation. The Surviving Corporation shall
be the REIT.
2.2 Certificate of Incorporation and Bylaws. The
Certificate of Incorporation and Bylaws of the REIT as in effect
immediately prior to the Effective Time shall be the Certificate
of Incorporation and Bylaws of the REIT at the Effective Time.
2.3 Officers and Directors. The officers of the REIT
immediately prior to the Effective Time shall continue as
officers of the Surviving Corporation and remain officers until
their successors are duly appointed or their prior resignation,
removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving
Corporation and shall remain directors until their successors are
duly elected and qualified or their prior resignation, removal or
death.
SECTION 3
CONSIDERATION FOR PARTNERSHIP ASSETS
3.1 Consideration Paid by the REIT. At or as of the
Effective Time, the assets and the liabilities of the Partnership
shall be the assets and liabilities of Company.
-2-
3.2 Consideration to the Partnership in the Merger
(a) REIT Shares. Except as provided in Section 3(b),
as of the Effective Time, each unit of limited partner interest
of the Partnership (the "Units") and the interest of the General
Partner entitled to receive consideration, if any, shall become
in the Merger the number of shares of the REIT's Common Stock,
$0.01 par value (the "REIT Shares"), as provided in Section 4.
No fractional REIT Shares shall be issued. Any Partner who would
be entitled to a fractional REIT Share will receive cash at the
rate of $9.34 per REIT Share (the "Exchange Price").
(b) Issuance of Notes. As of the Effective Time, each
Unit held of record by a Partner who does not vote in favor of
the Merger or who elects to do so, subject to the Note
Restriction as defined below, shall receive the REIT's unsecured,
convertible 6.0% Note due December 31, 2004, in the form of the
6.0% Note and Loan Agreement attached hereto as Exhibit A and
incorporated herein (the "Notes"). Any Partner of the
Partnership voting against the Merger (a "Dissenting Limited
Partner") shall receive Notes for his or her Units, unless he or
she timely elects to receive REIT Shares therefore. In no event
shall Notes in the principal amount of more than twenty percent
(20%) of the Partnership's Net Asset Value ("NAV"), as defined in
Section 4.3 below, be issued in the Merger (the "Note
Restriction"). Partners voting for or abstaining from voting for
the Merger may elect to receive Notes, provided that Notes shall
first the allocated to the Dissenting Limited Partners.
3.3 Issuance of Certificate for REIT Shares and Notes.
Upon or as soon as practicable after the Effective Time, the REIT
shall distribute in accordance with this Agreement to the holders
of the Units of each Partnership the Share Certificates and the
6.0% Notes to which they are entitled pursuant hereto.
SECTION 4
PARTNERSHIP INTERESTS
4.1 Conversion of the Units
(a) REIT Shares. At the Effective Time, each REIT
Share outstanding immediately prior to the Effective Time shall
remain outstanding and shall represent one REIT Share.
(b) Partnership Interests. At the Effective Time, the
Units of the Partnership issued and outstanding immediately prior
to the Effective Time shall, by virtue of the Merger and without
any action on the part of holder thereof, be converted into REIT
Shares or Notes determined in accordance with the Partnership's
Net Asset Value as set forth below.
-3-
<TABLE>
Calculation of Partnership
Net Asset Value (NAV)
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1998 Net Asset Value
REIT Shares and/or Notes
Payable to Partnership
Shares and Notes Offered per Unit
<CAPTION>
<S> <C> <C> <C> <C>
No. of REIT Maximum Principal No. of Principal
Shares Offered Amount of Notes Offered REIT Shares Amount of Note
To Limited Partnership
Interests:
To General Partner:
</TABLE>
As a result of the Merger and without any action on the part
of the holder thereof, at the Effective Time, all of the Units
and the general partner interests of the Partnership shall cease
to be outstanding and shall be canceled and retired, and each
holder of such Units or interests shall thereafter cease to have
any rights with respect to the Partnership Interest, except the
right to receive, without interest, the REIT Shares and cash for
fractional shares of the REIT Shares in accordance with this
Section 4.1 and 4.4(e), or Notes.
4.2 Adjustment to Conversion Price. The amount of REIT
Shares and/or Notes to be issued in the Merger to a Partnership
shall be adjusted as of the Effective Time as follows:
(i) If, during the period from March 31, 1998 to
and including the Effective Time, the
outstanding the REIT Shares shall have been
changed to a different number of shares or
securities by reason of any share dividend,
subdivision, reclassification,
recapitalization, share split, reverse share
split, combination, exchange of shares or the
like, shall be appropriately adjusted, and
(ii) If, as of the Effective Time the Net Cash of
the Partnership, as defined in Section 4.3
below, is different than its Net Cash amount
shown in Section 4.1 above, the Net Cash of
the Partnership shall be increased (if
greater) or decreased (if less) and the
number of REIT Shares issuable to the
Partnership in the Merger shall be increased
or decreased, as the case may be, by an
amount equal to such difference divided by
Exchange Price [;and
-4-
(iii) The Net Cash of the Partnership shall be
reduced by the difference between the
Partnership's share of the unpaid
balance of principal and interest on the
Atlas Note on March 31, 1998 and such
balance as of the Effective Time and the
number of REIT Shares issuable to the
Partnership in the Merger shall be
reduced by the number of REIT Shares
equal to the amount of such difference
divided by the Exchange Price. For the
purposes hereof, the Atlas Note shall
refer to that certain note dated October
9, 1997 by Transmark, Inc. in favor of
Taylor Income Investors IV and V Joint
Venture in the original amount of
$215,000.]
4.3 Definitions. For the purposes of this Section 4:
(a) "Net Asset Value" or "NAV" means the sum of the
price of a Partnership's properties set forth under Section 4.1
plus its Net Cash as of the Effective Time.
(b) "NET CASH" means, as of the date determined, (i)
the sum of a Partnership's cash and cash equivalents, less (ii)
the sum of the Partnership's liabilities, as determined on an
accrual accounting basis.
4.4 Exchange of Partnership Interests
(a) As of the Effective Time, the REIT shall deposit,
or shall cause to be deposited, with an exchange agent selected
by the REIT, which shall be the REIT's Transfer Agent or such
other party reasonably satisfactory to the Partnership (the
"Exchange Agent"), for the benefit of the Partners, for exchange
in accordance with this Section 4, certificates representing the
Total Shares and the cash in lieu of fractional REIT Shares and
Notes (such cash, certificates for the Total Shares and Notes,
together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund") to
be issued pursuant to Sections 4.1 and 4.2 and paid pursuant to
this Section 4.4 in exchange for the outstanding Units and
interests.
(b) Promptly after the Closing, the REIT shall cause
the Exchange Agent to mail to each holder of record of a
Partnership Interest (x) a certificate representing the number of
whole REIT Shares, (y) a check representing the amount of cash in
lieu of fractional shares, if any, and the principal amount of
the Note, if any, which such Partner has the right to receive in
respect of such Partner's Units surrendered pursuant to the
provisions of this Section 4, after giving effect to any required
withholding tax. No interest will be paid or accrued on the cash
in lieu of fractional shares and unpaid dividends and
distributions, if any, payable to the Partners with respect to
their Units. In the event of a transfer of ownership of a Unit
which is not registered in the transfer records of the
Partnership, a certificate representing the proper number of the
REIT Shares, together with a check for the cash to be paid in
lieu of fractional shares or Note, as the case may be, may be
-5-
issued to such a transferee if such holder presents to the
Exchange Agent, all documents required to evidence and effect
such transfer and to evidence that any applicable transfer taxes
have been paid.
(c) At and after the Effective Time, there shall be no
transfers on the transfer books of the Partnership of the Units
which were outstanding immediately prior to the Effective Time.
(d) No fractional REIT Shares shall be issued pursuant
hereto. In lieu of the issuance of any fractional REIT Shares
pursuant to Section 3.2(a), cash adjustments will be paid to
holders in respect of any fractional REIT Shares that would
otherwise be issuable, and the amount of such cash adjustment
shall be equal to such fractional proportion of the Exchange
Price.
(e) Any portion of the Exchange Fund (including the
proceeds of any investments thereof, any REIT Shares, and any
Note or interest thereon) that remains unclaimed by the former
Partners of the Partnership one year after the Effective Time
shall be delivered to the REIT. Any former Partners of the
Partnership who have not theretofore complied with this Section 4
shall thereafter look only to the REIT for delivery of their REIT
Shares, and payment of cash in lieu of fractional shares and/or
dividends on such REIT Shares in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each
case, without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange
Agent or any other person shall be liable to any former holder of
the Partner's Interest or with respect to the Units for any
amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
SECTION 5
REPRESENTATIONS AND WARRANTIES
OF THE PARTNERSHIPS
The Partnership represents and warrants to the REIT as set
forth below. As contemplated below, the "Partnership Disclosure
Letter" will be delivered to the REIT on or before the Closing.
The Partnership Disclosure Letter shall provide the information
or exceptions described below. The Partnership Disclosure Letter
shall be amended prior to Closing to cause such representations
and warranties to be materially true and correct on the Closing
Date, but the Partnership shall remain liable for any material
breach of such representations and warranties reflected in such
amendment only as provided in Section 9.5(d), below.
-6-
5.1 Existence; Good Standing; Authority; Compliance with Law
(a) The Partnership is a limited partnership, duly
formed, validly existing and in good standing under the laws of
the State of Texas [Nebraska]. To the General Partner's actual
knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing
under the laws of any other state of the United States in which
the character of the properties owned or leased by it therein or
in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of
operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all
requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted.
(b) To the General Partner's actual knowledge, it is
not in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which the
Partnership or any of its properties or assets are subject, where
such violation would have a Partnership Material Adverse Effect.
The Partnership has obtained all licenses, permits and other
authorizations and has taken all actions required by applicable
law or governmental regulations in connection with its business
as now conducted, where the failure to obtain any such item or to
take any such action would have a Partnership Material Adverse
Effect. A copy of the Partnership's Agreement of Limited
Partnership and Certificate of Limited Partnership (collectively,
the "Partnership Organizational Documents") have been delivered
or made available to the REIT and its counsel and such documents
will be listed in the Partnership Disclosure Letter and were or
will be true and correct when delivered or made available.
5.2 Authorization, Validity and Effect of Agreements. The
Partnership has the requisite power and authority to enter into
the transactions contemplated hereby and to execute and deliver
this Agreement and all other documents, agreements and
instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only
to the approval of this Agreement and the transactions
contemplated hereby in accordance with the Agreement of Limited
Partnership of the Partnership, the consummation by the
Partnership of this Agreement, the Partnership Ancillary
Agreements and the transactions contemplated hereby have been
duly authorized by all requisite action on the part of the
Partnership. In reliance upon the legal opinion described in
Section 8.2(e), the Partnership believes this Agreement
constitutes, and the Partnership Ancillary Agreements (when
executed and delivered pursuant hereto for value received) will
constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance
with their respective terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity (collectively,
"Equitable Remedies").
5.3 Future Issuances. To the Partnership's actual
knowledge, there are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements or commitments which
obligate the Partnership to issue, transfer or sell any of its
-7-
Units or other Partner Interests. After the Effective Time, the
REIT will have no obligation to issue, transfer or sell any the
Partnership Interest.
5.4 Other Interests. Except as set forth in the Partnership
Disclosure Letter, the Partnership does not own directly or
indirectly any interest or investment (whether equity or debt) in
any corporation, partnership, joint venture, business, trust or
entity (other than investments in short-term investment
securities) except as set forth in the Partnership Disclosure
Letter.
5.5 No Violation. To General Partner's actual knowledge,
neither the execution and delivery by the Partnership of this
Agreement nor the consummation by the Partnership of the
transactions contemplated hereby in accordance with the terms
hereof, will: (i) conflict with or result in a breach of any
provisions of the Agreement of Limited Partnership of the
Partnership; (ii) except as contemplated by the Partnership
Ancillary Agreements or as will be set forth in the Partnership
Disclosure Letter, violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance
required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of the
Partnership under, or result in being declared void, voidable or
without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust
or any license, franchise, permit, lease, contract, agreement or
other instrument, commitment or obligation to which the
Partnership is a party, or by which the Partnership or any of its
properties are bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a
Partnership Material Adverse Effect; or (iii) other than the
filings provided for in this Agreement to effect the Merger, any
filings required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act or applicable
state securities and "Blue Sky" laws (collectively, the
"Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with,
any domestic governmental or regulatory authority, except where
the failure to obtain any such consent, approval or authorization
of, or declaration, filing or registration with, any governmental
or regulatory authority would not have a Partnership Material
Adverse Effect.
5.6 Litigation. To the Partnership's actual knowledge,
there are (i) no continuing orders, injunctions or decrees of any
court, arbitrator or governmental authority to which the
Partnership is a party or by which any of its properties or
assets are bound or to which the General Partner is a party or by
which any of his/its properties or assets are bound, and (ii)
except as will be set forth in the Partnership Disclosure Letter,
no actions, suits or proceedings pending against the Partnership
or against the General Partner or, to the knowledge of the
General Partner, threatened against the Partnership or against
the General Partner, at law or in equity, or before or by any
federal or state commission, board, bureau, agency or
instrumentality that in the case of clauses (i) or (ii) above are
reasonably likely, individually or in the aggregate, to have a
Partnership Material Adverse Effect.
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5.7 Absence of Certain Changes. Except as disclosed in the
Partnership Reports, since December 31, 1998, (i) the Partnership
conducted its business only in the ordinary course of such
business (which for purposes of this section only, shall include
all acquisitions of real estate properties and financing
arrangements made in connection therewith); (ii) there has not
been any Partnership Material Adverse Effect; (iii) there has not
been any distribution, setting aside or payment of any
distribution with respect to any Partner interest in the
Partnership, and (iv) there has not been any material change in
the Partnership's accounting principles, practices or methods.
5.8 Taxes
(a) Except as may be set forth in the Partnership
Disclosure Letter, the Partnership (i) has timely filed all
federal, state and foreign tax returns including, without
limitation, information returns and reports required to be filed
by it for tax periods ended prior to the date of this Agreement
or requests for extensions have been timely filed and any such
request has been granted and has not expired and all such returns
are accurate and complete in all material respects, (ii) has paid
or accrued all taxes shown to be due and payable on such returns
or which have become due and payable pursuant to any assessment,
deficiency notice, 30-day letter or other notice received by it
and (iii) has properly accrued all taxes for such periods and
periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and
local income and franchise tax returns of the Partnership have
been or will be examined by any taxing authority. The Partnership
has not executed or filed with the Internal Revenue Service (the
"IRS") or any other taxing authority any agreement now in effect
extending the period for assessment or collection of any income
or other taxes.
(b) Except as may be set forth in the Partnership
Disclosure Letter, the Partnership is not a party to any pending
action or proceeding by any governmental authority for assessment
or collection of taxes, and no claim for assessment or collection
of taxes has been asserted against it. True, correct and complete
copies of all federal, state and local income or franchise tax
returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT
or made available to representatives of the REIT or will be so
delivered or made available prior to the Closing. The
Partnership does not hold any asset (i) the disposition of which
could be subject to rules similar to Section 1374 of the Internal
Revenue Code of 1986, as amended (the "Code") as a result of an
election under IRS Notice 88-19 or (ii) that is subject to a
consent filed pursuant to Section 341(f) of the Code and
regulations thereunder. For purposes of this Section 5.9, "taxes"
includes any interest, penalty or additional amount payable with
respect to any tax.
5.9 Books and Records. The books of account and other
financial records of the Partnership are in all material respects
true, complete and correct, have been maintained in accordance
with good business practices, and are accurately reflected in all
material respects in the financial statements included in the
Partnership Reports.
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5.10 Properties
(a) The Partnership owns fee simple title to, or an
interest in a Joint Venture which owns fee title to each of the
real properties reflected on the most recent balance sheet of the
Partnership included in the Partnership Reports or as may be
identified in the Disclosure Letter (the "Partnership
Properties"), which are all of the real estate properties owned
by it, free and clear of liens, mortgages or deeds of trust,
claims against title, charges which are liens or security
interests ("Encumbrances") except as will be noted in the
Partnership Disclosure Letter. To the General Partner's actual
knowledge, the Partnership Properties are not subject to any
rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations
of an interest in title (collectively, "Property Restrictions"),
except for (i) Encumbrances and Property Restrictions that will
be set forth in the Partnership Disclosure Letter, (ii) Property
Restrictions imposed or promulgated by law or any governmental
body or authority with respect to real property, including zoning
regulations, provided they do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property
Restrictions disclosed on existing title reports or current
surveys (in either case copies of which title reports and surveys
have been or will be delivered or made available to the REIT
prior to the Closing, 1998), (iv) mechanics', carriers',
workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which
have heretofore been bonded (and that will be listed in the
Partnership Disclosure Letter) or which individually or in the
aggregate do not exceed $10,000, do not materially detract from
the value of or materially interfere with the present use of any
of the Partnership Properties subject thereto or affected
thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or
been incurred only in its construction activities or in the
ordinary course of business.
(b) Valid policies of title insurance have been issued
insuring the Partnership's fee simple title to the Partnership
Properties subject only to the matters disclosed above and as
may be set forth in the Partnership Disclosure Letter, and such
policies are, at the date hereof, in full force and effect and no
claim has been made against any such policy. To the Partnership's
actual knowledge, except as will be set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license
from any governmental authority having jurisdiction over any of
the Partnership Properties or any agreement, easement or other
right which is necessary to permit the lawful use and operation
of the buildings and improvements on any of the Partnership
Properties or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and
ingress to and from any of the Partnership Properties that has
not been obtained and is not in full force and effect, or of any
pending threat of modification or cancellation of any of same;
(ii) the Partnership has not received written notice of any
material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion
of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose
building systems are not in working order in any material
respect; and (iv) there is (A) no physical damage to any
Partnership Property in excess of $10,000 for which there is no
insurance in effect covering the cost of the restoration, (B) no
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current renovation to any Partnership Property the cost of which
exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which
exceeds $10,000.
(c) Except as will be set forth in the Disclosure
Letter, the Partnership has not received notice to the effect
that and there are no (A) condemnation or rezoning proceedings
that are pending or threatened with respect to any of the
Partnership Properties or (B) zoning, building or similar laws,
codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any
buildings or other improvements on any of the Partnership
Properties or by the continued maintenance, operation or use of
the parking areas. All work to be performed, payments to be made
and actions to be taken by the Partnership prior to the date
hereof pursuant to any agreement entered into with a governmental
body or authority in connection with a site approval, zoning
reclassification or other similar action relating to the
Partnership Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been
performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or
actions that may be required after the date hereof pursuant to
such agreements, except as will be set forth in the Disclosure
Letter.
5.11 Environmental Matters. To the General Partner's actual
knowledge, the Partnership has not caused (i) the unlawful
presence of any hazardous substances, hazardous materials, toxic
substances or waste materials (collectively, "Hazardous
Materials") on any of the Partnership Properties, or (ii) any
unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from
the Partnership Properties as a result of any construction on or
operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a
Partnership Material Adverse Effect; and in connection with the
construction on or operation and use of the Partnership
Properties, the Partnership has not failed to comply, in any
material respect, with any applicable local, state and federal
environmental laws, regulations, ordinances and administrative
and judicial orders relating to the generation, recycling, reuse,
sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.12 Labor Matters. The Partnership is not a party to, or
bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union
organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the actual knowledge of the
General Partner, threatened against the Partnership relating to
its business, except for any such proceeding which would not have
a Partnership Material Adverse Effect. To the actual knowledge of
the General Partner, there are no organizational efforts with
respect to the formation of a collective bargaining unit
presently being made or threatened involving employees of the
Partnership.
5.13 No Brokers. Except the fee that is to be paid to
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan") by the Partnership as described in Section 5.14
below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may
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result in the obligation of the Partnership or the REIT to pay
any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby.
5.14 Opinions of Financial Advisor. The General Partner, on
behalf of the Partnership, has retained Houlihan to deliver its
opinion as to the value of the Partnership's properties (the
"Valuation Opinion") and to review the transaction contemplated
by this Agreement and to issue an opinion to the effect that, as
of the date of such opinion, the Purchase Price is fair to the
holders of the Units of the Partnership from a financial point
of view (the "Fairness Opinion").
5.15 Related Party Transactions. Except as set forth in the
Partnership Disclosure Letter, there are no arrangements,
agreements or contracts entered into by the Partnership with (i)
any consultant, (ii) any person who is an officer, director or
affiliate of the Partnership or the General Partner, any relative
of any of the foregoing or any entity of which any of the
foregoing is an affiliate, or (iii) any person who acquired the
Units of the Partnership in a private placement.
5.16 Contracts and Commitments. The Partnership Disclosure
Letter will set forth (i) all unsecured notes or other
obligations of the Partnership which individually may result in
total payments in excess of $10,000, (ii) all notes, debentures,
bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security
interests in the Partnership Properties or personal property of
the Partnership, and (iii) each commitment entered into by the
Partnership which may result in total payments or liability in
excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to March 31, 1998, will be
listed on the Disclosure Letter and will be materially true and
correct when delivered or made available. The Partnership has
not received any notice of a default that has not been cured
under any of the documents described in clause (i) above or is in
default respecting any payment obligations thereunder beyond any
applicable grace periods. All options of the Partnership to
purchase real property will be set forth on the Partnership
Disclosure Letter and such options and the Partnership's rights
thereunder are in full force and effect. All joint venture
agreements to which the Partnership is a party will be set forth
on the Partnership Disclosure Letter and the Partnership is not
in default with respect to any obligations, which individually or
in the aggregate are material, thereunder.
5.17 Development Rights. Set forth in the Partnership
Disclosure Letter will be a list of all material agreements
entered into by the Partnership relating to the development,
rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties,
which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true
and correct copies of all of which will be delivered or made
available to the REIT prior to the Closing, will be listed in the
Partnership Disclosure Letter, have not been modified and are
valid and binding in accordance with their respective terms.
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5.18 Convertible Securities. To the General Partner's actual
knowledge, the Partnership has no outstanding options, warrants
or other securities exercisable for, or convertible into, Units
or other Partner Interests of the Partnership, the terms of which
would require any anti-dilution adjustments by reason of the
consummation of the transactions contemplated hereby.
5.19 SEC Documents [If Reporting under 1934 Exchange Act].
(a) The Partnership has made available or will make
available to the REIT prior to _____________ 1998, each
registration statement, report, proxy statement or information
statement and all exhibits thereto prepared by it or relating to
its properties since January 1, 1995, each in the form (including
exhibits and any amendments thereto) filed with the U.S.
Securities and Exchange Commission (the "SEC") (collectively, the
"Partnership Reports"). The Partnership Reports, which were or
will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the
Partnership under the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act and the rules and regulations
promulgated thereunder (collectively the "Securities Laws") for
the periods stated above.
(b) To the Partnership's actual knowledge, as of their
respective dates, the Partnership Reports (i) complied as to form
in all material respects with the applicable requirements of the
Securities Laws and (ii) did not contain any untrue statement of
a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not
misleading. To the General Partner's actual knowledge, each of
the balance sheets of the Partnership included in or incorporated
by reference into the Partnership Reports (including the related
notes and schedules) fairly presents the financial position of
the Partnership as of its date and each of the consolidated
statements of income, retained earnings and cash flows of the
Partnership included in or incorporated by reference into the
Partnership Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings and
cash flows, as the case may be, of the Partnership for the
periods set forth therein (subject, in the case of unaudited
statements, to normal year-end audit adjustments which would not
be material in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein and
except, in the case of the unaudited statements, as permitted by
the Securities Laws.
(c) Except as and to the extent set forth on the
balance sheet of the Partnership at March 31, 1998, including all
notes thereto, or as set forth in the Partnership Reports, the
Partnership has no material liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that
would be required to be reflected on, or reserved against in, a
balance sheet of the Partnership or in the notes thereto,
prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in
the ordinary course of business since such date which would not
have a Partnership Material Adverse Effect.
-13-
SECTION 6
REPRESENTATIONS AND WARRANTIES OF THE REIT
The REIT represents and warrants to the Partnership as set
forth below. As contemplated below, the "REIT Disclosure Letter"
will be delivered to the Partnership on or before the Closing.
The REIT Disclosure Letter shall provide the information or
exceptions described below. The REIT Disclosure Letter shall be
amended prior to Closing to cause such representations and
warranties to be materially true and correct on the Closing Date,
but the REIT shall remain liable for any material breach of such
representations and warranties reflected in such amendment only
as provided in Section 9.5(d), below.
6.1 Existence; Good Standing; Authority; Compliance with Law
(a) The REIT is a corporation duly organized and
validly existing under the laws of the State of Maryland. To the
REIT's actual knowledge, the REIT is duly licensed or qualified
to do business and is in good standing under the laws of any
other state of the United States in which the character of the
properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary,
except where the failure to be so qualified would not have a
material adverse effect on the business, results of operations or
financial condition of the REIT and its subsidiaries taken as a
whole (a "REIT Material Adverse Effect"). The REIT has all
requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each
of the REIT's Subsidiaries is a corporation, or partnership duly
organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has the
requisite power and authority to own its properties and to carry
on its business as it is now being conducted, and is duly
qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the
conduct of its business requires such qualification, except for
jurisdictions in which such failure to be so qualified or to be
in good standing would not have a REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT
nor any REIT Subsidiary is in violation of any order of any
court, governmental authority or arbitration board or tribunal,
or any law, ordinance, governmental rule or regulation to which
the REIT or any REIT Subsidiary or any of their respective
properties or assets are subject, where such violation would have
a REIT Material Adverse Effect. The REIT and its Subsidiaries
have obtained all licenses, permits and other authorizations and
have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted,
where the failure to obtain any such item or to take any such
action would have a REIT Material Adverse Effect. Copies of the
REIT's and its Subsidiaries' Articles of Incorporation, Bylaws,
organizational documents and partnership and joint venture
agreements have been or will be prior to the Closing, delivered
or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and
correct when delivered or made available. For the purposes of the
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immediately preceding sentence, the term "Subsidiary" shall
include the entities set forth in the REIT Disclosure Letter,
which are all of the REIT's Subsidiaries.
6.2 Authorization, Validity and Effect of Agreements. The
REIT has the requisite power and authority to enter into the
transactions contemplated hereby and to execute and deliver this
Agreement and all other documents, agreements and instruments
related to the transactions contemplated by this Agreement to
which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the issuance of the REIT Shares and the
Notes pursuant to the Merger contemplated hereby by the holders
of a majority of the outstanding the REIT Shares, present and
voting thereon, the consummation by the REIT of this Agreement,
the REIT Ancillary Agreements and the transactions contemplated
hereby have been duly authorized by all requisite action on the
part of the REIT. This Agreement constitutes, and the REIT
Ancillary Agreements (when executed and delivered pursuant hereto
for value received) will constitute, the valid and legally
binding obligations of the REIT enforceable against the REIT in
accordance with their respective terms, subject to Equitable
Remedies.
6.3 Capitalization. On ____________, 1998, the authorized
capital stock of the REIT consists of _______________ Common
Shares. As of the date hereof, all _______________ Common Shares
are outstanding. The REIT has no outstanding bonds, debentures,
notes or other obligations, the holders of which have the right
to vote (or which are convertible into or exercisable for
securities having the right to vote) with the shareholders of the
REIT on any matter. Except as set forth in the REIT Disclosure
Letter, all such issued and outstanding of REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. Except as set forth in the REIT Disclosure
Letter, there are not at the date of this Agreement any existing
options, warrants, calls, subscriptions, convertible securities,
or other rights, agreements or commitments which obligate the
REIT or any of its Subsidiaries to issue, transfer or sell any
shares or other equity interest of the REIT or any of its
Subsidiaries except under any employee incentive plan approved by
the REIT's shareholders. There are no agreements or
understandings to which the REIT is a party with respect to the
voting of any REIT Shares or which restrict the transfer of any
such shares, except in order to protect its REIT status.
6.4 Subsidiaries. Except as set forth in the REIT
Disclosure Letter, the REIT owns directly or indirectly each of
the outstanding shares of capital stock or all of the partnership
or other equity interests of each of the REIT's Subsidiaries
(except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and
clear of all liens, pledges, security interests, claims or other
encumbrances other than liens imposed by local law which are not
material.
6.5 Other Interests. Except as will be disclosed in the
REIT Disclosure Letter and except for interests in the REIT
Subsidiaries, neither the REIT nor any REIT Subsidiary owns
directly or indirectly any interest or investment (whether equity
or debt) in any corporation, partnership, joint venture,
business, trust or entity (other than investments in short-term
investment securities).
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6.6 No Violation. Neither the execution and delivery by the
REIT of this Agreement nor the consummation by the REIT of the
transactions contemplated hereby in accordance with the terms
hereof, will: (i) conflict with or result in a breach of any
provisions of the REIT's Declaration of Trust; (ii) violate, or
conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation
of any lien, security interest, charge or encumbrance upon any of
the properties of the REIT or its Subsidiaries under, or result
in being declared void, voidable or without further binding
effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which the REIT or any of
its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected,
except for any of the foregoing matters which, individually or in
the aggregate, would not have a REIT Material Adverse Effect; or
(iii) other than the Regulatory Filings require any consent,
approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory
authority, except where the failure to obtain such consent,
approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would
not have a REIT Material Adverse Effect.
6.7 SEC Documents
(a) The REIT has made available or will make available
to the Partnership prior to the Closing, the registration
statements of the REIT filed with the SEC in connection with
public offerings of REIT securities since its inception and all
exhibits, amendments and supplements thereto (the "REIT
Registration Statements"), and each registration statement,
report, proxy statement or information statement and all exhibits
thereto prepared by it or relating to its properties since the
effective date of the latest REIT Registration Statement, each in
the form (including exhibits and any amendments thereto) filed
with the SEC (collectively, the "REIT Reports"). The REIT
Reports, which were or will be filed with the SEC in a timely
manner, constitute all forms, reports and documents required to
be filed by the REIT under the Securities Laws.
(b) To the REIT's actual knowledge, as of their
respective dates, the REIT Reports (i) complied as to form in all
material respects with the applicable requirements of the
Securities Laws, and (ii) did not contain any untrue statement of
a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the
consolidated balance sheets of the REIT included in or
incorporated by reference into the REIT Reports (including the
related notes and schedules) fairly presents the consolidated
financial position of the REIT and the REIT Subsidiaries as of
its date and each of the consolidated statements of income,
retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any
related notes and schedules) fairly presents the results of
operations, retained earnings or cash flows, as the case may be,
-16-
of the REIT and the REIT Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments which would not be material in amount
or effect), in each case in accordance with generally accepted
accounting principles consistently applied during the periods
involved, except as may be noted therein and except, in the case
of the unaudited statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the
consolidated balance sheet of the REIT and its Subsidiaries at
March 31, 1998, including all notes thereto, or as set forth in
the REIT Reports, neither the REIT nor any of the REIT
Subsidiaries has any material liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that
would be required to be reflected on, or reserved against in, a
balance sheet of the REIT or in the notes thereto, prepared in
accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a REIT
Material Adverse Effect.
6.8 Litigation. To the REIT's actual knowledge, there are
(i) no continuing orders, injunctions or decrees of any court,
arbitrator or governmental authority to which the REIT or any
REIT Subsidiary is a party or by which any of its properties or
assets are bound or, to which any of its directors, officers, or
affiliates is a party or by which any of their properties or
assets are bound, and (ii) except as will be set forth in the
REIT Disclosure Letter, no actions, suits or proceedings pending
against the REIT or any REIT Subsidiary or, to the knowledge of
the REIT, against any of its Directors, officers, or affiliates
or, to the knowledge of the REIT, threatened against the REIT or
any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or
state commission, board, bureau, agency or instrumentality, that
in the case of clauses (i) or (ii) above are reasonably likely,
individually or in the aggregate, to have a REIT Material Adverse
Effect.
6.9 Absence of Certain Changes. Except as disclosed in the
REIT Reports filed with the SEC prior to the date hereof, (i) the
REIT and its Subsidiaries have conducted their business only in
the ordinary course of such business (which, for purposes of this
section only, shall include all acquisitions of real estate
properties and financing arrangements made in connection
therewith); (ii) there has not been any REIT Material Adverse
Effect; (iii) there has not been any declaration, setting aside
or payment of any dividend or other distribution with respect to
the REIT Shares; and (iv) there has not been any material change
in the REIT's accounting principles, practices or methods.
6.10 Taxes
(a) Except as may be disclosed in the REIT Disclosure
Letter, the REIT and each of its Subsidiaries (i) has timely
filed all federal, state and foreign tax returns including,
without limitation, information returns and reports required to
be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely
filed and any such request has been granted and has not expired
and all such returns are absolute and complete in all material
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respects, (ii) has paid or accrued all taxes shown to be due and
payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or
other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such
returns. Neither the REIT nor any of its Subsidiaries has
received notice that the federal, state and local income and
franchise tax returns of the REIT or any such Subsidiary has been
or will be examined by any taxing authority. Neither the REIT nor
any of its Subsidiaries has executed or filed with the IRS or any
other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as will be disclosed in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries is a party
to any pending action or proceeding by any governmental authority
for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local
income or franchise tax returns filed by the REIT and each of its
Subsidiaries and all communications relating thereto have been
delivered to the Partnership or made available to representatives
of the Partnership or will be so delivered or made available
prior to the Closing. The REIT (i) has qualified to be taxed as a
REIT pursuant to Sections 856 through 859 of the Code for its
taxable years ended December 31, 1995 through 1997, inclusive
(ii) has operated, and intends to continue to operate, in such a
manner as to qualify to be taxed as a REIT pursuant to Sections
856 through 859 of the Code for its taxable year ended on the
effective date of the Merger, and (iii) has not taken or omitted
to take any action which could result in, and each of the
executive officers of the REIT, each acting in his respective
capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. REIT represents that each of its Subsidiaries
is a Qualified REIT Subsidiary as defined in Section 856(i) of
the Code. Neither the REIT nor any of its Subsidiaries holds any
asset (i) the disposition of which could be subject to rules
similar to Section 1374 of the Code as a result of an election
under IRS Notice 88-19 or (ii) that is subject to a consent filed
pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 6.10, "taxes" includes
any interest, penalty or additional amount payable with respect
to any tax.
6.11 Books and Records
(a) The books of account and other financial records
of the REIT and its Subsidiaries are in all material respects
true, complete and correct, have been maintained in accordance
with good business practices, and are accurately reflected in all
material respects in the financial statements included in the
REIT Reports.
(b) The minute books and other records of the REIT and
its Subsidiaries contain in all material respects accurate
records of all meetings and accurately reflect in all material
respects all other corporate action of the shareholders and the
Board and any committees of the Board and its Subsidiaries.
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6.12 Properties
(a) The REIT and its Subsidiaries own, and each joint
venture to which the REIT or its subsidiary is a party owns, fee
simple title to each of the real properties reflected on the most
recent balance sheet of the REIT included in the REIT Reports or
as may be identified in the REIT Disclosure Letter (the "REIT
Properties"), which are all of the real estate properties owned
by them, free and clear of Encumbrances. To the REIT's actual
knowledge, the REIT Properties are not subject to any rights of
way, written agreements, laws, ordinances and regulations
affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except
for (i) Encumbrances and Property Restrictions that will be set
forth in the REIT Disclosure Letter, (ii) Property Restrictions
imposed or promulgated by law or any governmental body or
authority with respect to real property, including zoning
regulations, provided they do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property
Restrictions disclosed on existing title reports or surveys (in
either case copies of which title reports and surveys have been
or will be delivered or made available to the Partnership prior
to the Closing, and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions
and other limitations of any kind, if any, which have heretofore
been bonded (and that will be listed in the REIT Disclosure
Letter) or which individually or in the aggregate, do not exceed
$100,000, do not materially detract from the value of or
materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not
otherwise materially impair business operations conducted by the
REIT and its Subsidiaries and which have arisen or been incurred
only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued
insuring the REIT's or any of its Subsidiaries' fee simple title
to the REIT Properties, subject only to the matters disclosed
above and as may be set forth in the REIT Disclosure Letter, and
such policies are, at the date hereof, in full force and effect
and no material claim has been made against any such policy. To
the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or
license from any governmental authority having jurisdiction over
any of the REIT Properties or any agreement, easement or other
right which is necessary to permit the lawful use and operation
of the buildings and improvements on any of the REIT Properties
or which is necessary to permit the lawful use and operation of
all driveways, roads and other means of egress and ingress to and
from any of the REIT Properties that has not been obtained and is
not in full force and effect, or of any pending threat of
modification or cancellation of any of same; (ii) neither the
REIT nor its Subsidiaries has received written notice of any
material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion
of any of the REIT Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
REIT Properties and no the REIT Properties whose building systems
are not in working order in any material respect; and (iv) there
is (A) no physical damage to any the REIT Property in excess of
$10,000 for which there is no insurance in effect covering the
cost of the restoration, (B) no current renovation to any the
REIT Property the cost of which exceeds $100,000 and (C) no
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current restoration (excluding tenant improvements) of any the
REIT Property the cost of which exceeds $100,000.
(c) Except as will be set forth in the REIT Disclosure
Letter, the REIT or its Subsidiaries have received no notice to
the effect that and there are no (A) condemnation or rezoning
proceedings that are pending or threatened with respect to any of
the REIT Properties or (B) any zoning, building or similar laws,
codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any
buildings or other improvements on any of the REIT Properties or
by the continued maintenance, operation or use of the parking
areas in any material respect. All work to be performed, payments
to be made and actions to be taken by the REIT or its
Subsidiaries prior to the date hereof pursuant to any agreement
entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar
action relating to the REIT Properties (e.g., Local Improvement
District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the
REIT is not aware of any planned or proposed work, payments or
actions that may be required after the date hereof pursuant to
such agreements, except as will be set forth in the REIT
Disclosure Letter.
6.13 Environmental Matters. To the actual knowledge of the
REIT, none of the REIT, any of its Subsidiaries or, any other
person has caused or permitted (i) the unlawful presence of any
Hazardous Materials on any of the REIT Properties, or (ii) any
unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from
the REIT Properties as a result of any construction on or
operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a REIT
Material Adverse Effect; and in connection with the construction
on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect,
with any applicable local, state and federal environmental laws,
regulations, ordinances and administrative and judicial orders
relating to the generation, recycling, reuse, sale, storage,
handling, transport and disposal of any Hazardous Materials.
6.14 Labor Matters. Neither the REIT nor any of its
Subsidiaries is a party to, or bound by, any collective
bargaining agreement, contract or other agreement or
understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding
pending or, to the knowledge of the executive officers of the
REIT, threatened against the REIT or its Subsidiaries relating to
their business, except for any such proceeding which would not
have the REIT Material Adverse Effect. To the knowledge of the
REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or
threatened involving employees of the REIT or any of its
Subsidiaries.
6.15 No Brokers. Except for the fee payable to Bishop Crown
Investment Research, Inc. ("Bishop-Crown") as described in
Section 6.16 below, the REIT has not entered into any contract,
arrangement or understanding with any person or firm which may
result in the obligation of the REIT or the Partnership to pay
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any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby. The REIT is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby.
6.16 Opinion of Financial Advisor. The REIT has retained
Bishop-Crown to review the transaction contemplated by this
Agreement and to issue an opinion as to the fairness to the REIT,
from a financial point of view, of the consideration to be paid
by the REIT pursuant to the Merger.
6.17 Partnership Share Ownership. Except as may be set forth
in the REIT Disclosure Letter, neither the REIT nor any of its
Subsidiaries owns any Units or other partner interests of the
Partnership or other securities convertible into the Partnership
interests.
6.18 The REIT Shares. The issuance and delivery by the REIT
of the REIT Shares in connection with the Merger and this
Agreement have been duly and validly authorized by all necessary
action on the part of the REIT except for the approval of its
shareholders contemplated by this Agreement. The REIT Shares to
be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that
shareholders may be subject to further assessment with respect to
certain claims for tort, contract, taxes, statutory liability and
otherwise in some jurisdictions to the extent such claims are not
satisfied by the REIT.
6.19 The Notes. The issuance and delivery by the REIT of the
Notes in connection with the Merger and this Agreement have been
duly and validly authorized by all necessary action on the part
of the REIT except for the approval of its shareholders
contemplated by this Agreement. The Notes to be issued in
connection with the Merger and this Agreement, when issued in
accordance with the terms of this Agreement, will constitute
binding obligations of the REIT enforceable in accordance with
these terms, subject to the laws respecting debtor rights
generally, except that shareholders may be subject to further
assessment with respect to certain claims for tort, contract,
taxes, statutory liability and otherwise in some jurisdictions to
the extent such claims are not satisfied by the REIT.
6.20 Convertible Securities. Except as disclosed in the
REIT Disclosure letter, the REIT has no outstanding options,
warrants or other securities exercisable for, or convertible
into, shares of the REIT Shares, the terms of which would require
any anti-dilution adjustments by reason of the consummation of
the transactions contemplated hereby.
6.21 Related Party Transactions. Set forth in the REIT
Disclosure Letter will be a list of all arrangements, agreements
and contracts entered into by the REIT or any of its Subsidiaries
with (i) any person who is an officer, director or affiliate of
the REIT or any of its Subsidiaries, any relative of any of the
foregoing or any entity of which any of the foregoing is an
affiliate or (ii) any person who acquired the REIT Shares in a
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private placement. The copies of such documents, all of which
have been or will be delivered or made available to the
Partnership prior to the Closing, are or will be true, complete
and correct when delivered or made available.
6.22 Contracts and Commitments. The REIT Disclosure Letter
will set forth (i) all unsecured notes or other obligations of
the REIT and the REIT Subsidiaries which individually may result
in total payments in excess of $100,000, (ii) notes, debentures,
bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security
interests in the REIT Properties or personal property of the REIT
and its Subsidiaries, and (iii) each commitment entered into by
the REIT or any of its Subsidiaries which individually may result
in total payments or liability in excess of $100,000. Copies of
the foregoing have been or will be delivered or made available to
the Partnership prior to the Closing will be listed on the REIT
Disclosure Letter and are or will be materially true and correct
when delivered or made available. None of the REIT or any of its
Subsidiaries has received any notice of a default that has not
been cured under any of the documents described in clause (i) or
(ii) above or is in default respecting any payment obligations
thereunder beyond any applicable grace periods. All options of
the REIT or any of its Subsidiaries to purchase real property
will be set forth on the REIT Disclosure Letter and such options
and the REIT's or its Subsidiaries' rights thereunder are in full
force and effect. All joint venture agreements to which the REIT
or any of its Subsidiaries is a party will be set forth on the
REIT Disclosure Letter and the REIT or its Subsidiaries are not
in default with respect to any obligations, which individually or
in the aggregate are material, thereunder.
6.23 Development Rights. Set forth in the REIT Disclosure
Letter will be a list of all material agreements entered into by
the REIT or any of its Subsidiaries relating to the development,
rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties
which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements,
true, complete and correct copies of all of which have been or
will be delivered or made available to the Partnership prior to
the Closing will be listed in the REIT Disclosure Letter.
6.24 Certain Payments Resulting From Transactions. Except as
Disclosed in the REIT Disclosure Letter, the execution of, and
performance of the transactions contemplated by, this Agreement
will not (either alone or upon the occurrence of any additional
or subsequent events) (i) constitute an event under any the REIT
Benefit Plan, policy, practice, agreement or other arrangement or
any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect
to any employee, director or consultant of the REIT or any of its
Subsidiaries unless such rights have been waived by any such
person, or (ii) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the
Partnership to amend or terminate any Employee Arrangement and
receive the full amount of any excess assets remaining or
resulting from such amendment or termination, subject to
applicable taxes. No payment or benefit which will be required to
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be made pursuant to the terms of any agreement, commitment or the
REIT Benefit Plan, as a result of the transactions contemplated
by this Agreement, to any officer, director or employee of the
REIT or any of its Subsidiaries, will be characterized as an
"excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 7
COVENANTS
7.1 Acquisition Proposals. Prior to the Effective Time, the
Partnership and the REIT each agree (i) that neither of them nor
any of their Subsidiaries shall, and each of them shall direct
and use its best efforts to cause its respective officers,
general partner(s), limited partners, Directors, employees,
agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries), as applicable, not
to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to
its shareholders or limited partners) with respect to a merger,
acquisition, tender offer, exchange offer, consolidation or
similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities (or
any debt securities convertible into equity securities) of, such
party or any of its Subsidiaries, other than the transactions
contemplated by this Agreement (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage
in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal;
(ii) that it will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing
and each will take the necessary steps to inform the individuals
or entities referred to above of the obligations undertaken in
this Section 7.1; and (iii) that it will notify the other party
immediately if any such inquiries or proposals are received by,
any such information is requested from, or any such negotiations
or discussions are sought to be initiated or continued with, it;
provided, however, that nothing contained in this Section 7.1
shall prohibit the General Partner or the Board from (x)
furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited
bona fide Acquisition Proposal, if, and only to the extent that,
(A) the General Partner or the Board, as applicable, determines
in good faith that such action is required for it to comply with
its fiduciary duties to limited partners or shareholders, as
applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or
negotiations with, such person or entity, such party provides
written notice to the other party to this Agreement to the effect
that it is furnishing information to, or entering into
discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such
party determined in good faith was required to be executed in
order for the General Partner or the Board, as applicable, to
comply with its fiduciary duties to limited partners or
shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement
informed of the status (but not the terms) of any such
discussions or negotiations; and (y) to the extent applicable,
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complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal.
Nothing in this Section 7.1 shall (i) permit any party to
terminate this Agreement (except as specifically provided in
Section 9 hereof), (ii) permit any party to enter into any
agreement with respect to an Acquisition Proposal during the term
of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any
person that provides for, or in any way facilitates, an
Acquisition Proposal (other than a confidentiality agreement in
customary form)), or (iii) affect any other obligation of any
party under this Agreement.
7.2 Conduct of Businesses
(i) Prior to the Effective Time, except as may be set forth
in the Partnership Disclosure Letter or the REIT Disclosure
Letter or as contemplated by this Agreement, unless the other
party has consented in writing thereto, the REIT and the
Partnership:
(a) Shall use their reasonable efforts, and shall
cause each of their respective Subsidiaries to use their
reasonable efforts, to preserve intact their business
organizations and goodwill and keep available the services
of their respective officers and employees;
(b) Shall confer on a regular basis with one or more
representatives of the other to report operational matters
of materiality and, subject to Section 7.1, any proposals to
engage in material transactions;
(c) Shall promptly notify the other of any material
emergency or other material change in the condition
(financial or otherwise) of the business, properties, assets
or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating
that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant
or agreement contained herein;
(d) Shall continue to pay quarterly dividends or
distributions, as the case may be, at the interest rates but
shall not make any other distributions payable with respect
to the REIT Shares and Partnership Interests, respectively;
and
(e) Shall promptly deliver to the other true and
correct copies of any report, statement or schedule filed
with the SEC subsequent to the date of this Agreement.
(ii) Prior to the Effective Time, except as may be set forth
in the Partnership Disclosure Letter, unless the REIT has
consented (such consent not to be unreasonably withheld or
delayed) in writing thereto, the Partnership:
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(a) Shall conduct its operations according to its
usual, regular and ordinary course in substantially the same
manner as heretofore conducted;
(b) Shall not amend the Partnership Organizational
Documents;
(c) Shall not (i) except pursuant to the exercise of
options, warrants, conversion rights and other contractual
rights existing on the date hereof and disclosed pursuant to
this Agreement, issue any Units or other Partner interests
in the Partnership, make any distribution, effect any
recapitalization or other similar transaction, (ii) grant,
confer or award any option, warrant, conversion right or
other right not existing on the date hereof to acquire any
Partnership Units, (iii) increase any compensation or enter
into or amend any employment agreement with the General
Partner or any of the present or future affiliates of the
General Partner, or (iv) adopt any new employee benefit plan
or amend any existing employee benefit plan in any material
respect, except for changes which are less favorable to
participants in such plans;
(d) Shall not declare, set aside or make any
distribution or payment with respect to any Units or other
Partner interests in the Partnership or directly or
indirectly redeem, purchase or otherwise acquire any Units
or other Partner interest in the Partnership, or make any
commitment for any such action;
(e) Shall not sell or otherwise dispose of (i) any
Partnership Properties, or (ii) except in the ordinary
course of business, any of its other assets which are
material, individually or in the aggregate;
(f) Shall not make any loans, advances or capital
contributions to, or investments in, any other person;
(g) Shall not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of
business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the
Partnership included in the Partnership Reports or incurred
in the ordinary course of business consistent with past
practice;
(h) Shall not enter into any commitment which
individually may result in total payments or liability by or
to it in excess of $10,000 (or 5% of its Net Asset Value, if
less) in the case of any one commitment or in excess of
$20,000 (or 10% of its Net Asset Value, if less) for all
commitments;
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(i) Shall not, and shall not permit any of its
Subsidiaries to, enter into any commitment with any officer,
director or affiliate of the Partnership or its General
Partner(s) except to the extent the same occur in the
ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect;
and
(j) Shall not enter into or terminate any lease
representing annual revenues of $10,000 or more (or 5% of
its Net Asset Value, if less).
(iii) Prior to the Effective Time, except as may be set
forth in the REIT Disclosure Letter, unless the Partnership has
consented (such consent not to be unreasonably withheld or
delayed) in writing thereto, the REIT:
(a) Shall, and shall cause each of its Subsidiaries
to, conduct its operations according to their usual, regular
and ordinary course in substantially the same manner as
heretofore conducted;
(b) Shall not amend its Articles of Incorporation or
Bylaws except as contemplated by this Agreement;
(c) Shall not (i) except pursuant to the exercise of
options, warrants, conversion rights and other contractual
rights (including the REIT's existing dividend reinvestment
plan) existing on the date hereof and disclosed pursuant to
this Agreement, issue any shares of its capital stock,
effect any share split, reverse share split, share dividend,
recapitalization or other similar transaction, (ii) grant,
confer or award any option, warrant, conversion right or
other right not existing on the date hereof to acquire any
shares of its capital stock (except pursuant to any employee
incentive plan approved by shareholders), (iii) amend any
employment agreement with any of its present or future
officers or the Board, or (iv) adopt any new employee
benefit plan (including any share option, share benefit or
share purchase plan) except the employee incentive plan to
be voted on at its shareholder meeting for the fiscal year
ended December 31, 1998;
(d) Shall not declare (except as provided above for
the continuing payment of quarterly dividends), set aside or
pay any dividend or make any other distribution or payment
with respect to any common shares or directly or indirectly
redeem, purchase or otherwise acquire any common shares or
capital stock of any of its Subsidiaries, or make any
commitment for any such action;
(e) Except as will be set forth in the REIT Disclosure
Letter, shall not, and shall not permit any of its
Subsidiaries to, sell or otherwise dispose of (i) any the
REIT Properties or any of its capital stock of or other
interests in Subsidiaries or (ii) except in the ordinary
course of business, any of its other assets which are
material, individually or in the aggregate;
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(f) Shall not, and shall not permit any of its
Subsidiaries to (except in the ordinary course of business),
make any loans, advances or capital contributions to, or
investments in, any other person other than in connection
with the sale of properties;
(g) Shall not, and shall not permit any of its
Subsidiaries to, pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of
business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the REIT
included in the REIT Reports or incurred in the ordinary
course of business consistent with past practice;
(h) Shall not, and shall not permit any of its
Subsidiaries to, enter into any commitment which
individually may result in total payments or liability by or
to it in excess of $50,000 in the case of any one commitment
or in excess of $250,000 for all commitments, except for
those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure
Letter; and
(i) Shall not, and shall not permit any of its
Subsidiaries to, enter into any commitment with any officer,
director or affiliate of the REIT or any of its
Subsidiaries, except as herein or in the REIT Disclosure
Letter provided and except in the ordinary course of
business.
For purposes of this Section 7.2, any consent shall be
deemed to be unreasonably delayed if notice of consent or
withholding of consent is not received within three days of
request. Further, if no response is received by the end of
business on such third day, the party receiving the request shall
be deemed to have consented to such action.
7.3 Meetings of Shareholders and Partners. Each of the REIT
and the Partnership will take all action necessary in accordance
with applicable law and its organizational documents to convene a
meeting of its shareholders or partners, as applicable, as
promptly as practicable to consider and vote upon or otherwise to
obtain the consent of its shareholders or partners, as
applicable, to approve this Agreement and the transactions
contemplated hereby. The General Partner and the Board shall each
recommend such approval and the REIT and the Partnership shall
each take all lawful action to solicit such approval, including,
without limitation, timely mailing the Consent
Statement/Prospectus (as defined in Section 7.7); provided,
however, that such recommendation or solicitation is subject to
any action taken by, or upon authority of, the General Partner
and the Board, as the case may be, in the exercise of its good
faith judgment as to its fiduciary duties to its shareholders or
partners, as applicable, imposed by law as advised by counsel.
The REIT and the Partnership shall coordinate and cooperate with
respect to the timing of such meetings and shall use their best
efforts to hold such meetings on the same day.
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7.4 Filings; Other Action. Subject to the terms and
conditions herein provided, the Partnership and the REIT shall:
(a) use all reasonable efforts to cooperate with one another in
(i) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the
Effective Time from governmental or regulatory authorities of the
United States and the several states in connection with the
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals,
permits or authorizations; (b) use all reasonable efforts to
obtain in writing any consents required from third parties in
form reasonably satisfactory to the Partnership and the REIT
necessary to effectuate the Merger; and (c) use all reasonable
efforts to take, or cause to be taken, all other action and do,
or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions
contemplated by this Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to
carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such
necessary action.
7.5 Inspection of Records. From the date hereof to the
Effective Time, each of the Partnerships and the REIT shall allow
all designated officers, attorneys, accountants and other
representatives of the other access at all reasonable times to
the records and files, correspondence, audits and properties, as
well as to all information relating to commitments, contracts,
titles and financial position, or otherwise pertaining to the
business and affairs of the Partnership and the REIT and their
respective Subsidiaries.
7.6 Publicity. The Partnership and the REIT shall, subject
to their respective legal obligations (including requirements of
stock exchanges and other similar regulatory bodies), consult
with each other, and use reasonable efforts to agree upon the
text of any press release before issuing any such press release
or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with
any federal or state governmental or regulatory agency or with
any national securities exchange with respect thereto.
7.7 Regulatory Filings. The REIT and Partnership shall
cooperate and promptly prepare and the REIT shall (i) file with
the California Department of Corporations an application for
permit pursuant to Section 25121 of the California Corporate
Securities Law of 1968, as amended (the "California Act") and a
request for a fairness hearing pursuant to Section 25143 of the
California Act and for the issuance of the REIT Shares and Notes
under the Merger (the "California Application") and (ii) file
with the SEC as soon as practicable Joint Preliminary Consent
Solicitation material under section 14(a) of the Exchange Act,
with respect to the REIT Shares issuable in connection with the
Merger (the "Consent Statement"). The respective parties will
cause the California Application and the Consent Statement to
comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules
and regulations promulgated thereunder. The REIT shall use all
reasonable efforts, and the Partnership will cooperate with the
REIT to have the California Application declared effective by the
California Department of Corporation as promptly as practicable.
The REIT shall use its best efforts to obtain, prior to the
filing of one Definitive Consent Statement, any necessary state
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securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by this Agreement and
will pay all expenses incident thereto. The REIT agrees that the
Consent Statement and each amendment or supplement thereto, at
the time of mailing thereof and at the time of the respective
meetings of shareholders and partners, respectively, of the REIT
and the Partnership, or, in the case of the California
Application and each amendment or supplement thereto, at the time
it is filed or becomes effective, will not include an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing shall
not apply to the extent that any such untrue statement of a
material fact or omission to state a material fact was made by
the REIT in reliance upon and in conformity with written
information concerning the Partnership furnished to the REIT by
the Partnership specifically for use in the Consent Statement.
The Partnership agrees that the written information provided by
it specifically for inclusion in the Consent Statement and each
amendment or supplement thereto, at the time of mailing thereof
and at the time of the respective meetings of shareholders and
partners, respectively, of the REIT and the Partnership, or, in
the case of written information provided by the Partnership
specifically for inclusion in the California Application, the
Consent Statement or any amendments or supplement thereto, at the
time it is filed or becomes effective, will not include an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading. The REIT will advise the Partnership,
promptly after it receives notice thereof, of the time when the
California Application will become effective and when the
Definitive Consent Statement may be filed or any supplement or
amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the REIT Shares issuable in
connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the
Consent Statement or the California Application or comments
thereon and responses thereto or requests by the SEC or the
California Department of Corporations for additional information.
7.8 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the
conditions of performances set forth herein or the waiver
thereof, perform such further acts and execute such documents as
may reasonably be required to effect the Merger.
7.9 Expenses. Subject to Section 9.3, all transaction costs
and expenses of the Merger in connection with the Merger
Agreement, the transactions contemplated thereby and of the
mergers of each other Partnership to whom the REIT makes a merger
offer pursuant to the Definitive Consent Statement (the "Merger
Expenses") shall be paid by the REIT (the "REIT Expenses"),
except the Partnership shall pay its Proportionate Share, as
defined below, of the costs of the Houlihan Valuation Opinion
and the Houlihan Fairness Opinion delivered to the General
Partner (collectively the "Houlihan Opinions"), the legal and
accounting costs of the Partnerships to whom such merger offers
are made by the REIT (and any other costs in connection with the
valuation or appraisal of such partnerships' properties prepared
for the benefit of such partnerships or their partners) (the
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"Partnership Merger Expenses"). In addition, the Partnership
will bear its own direct costs of partner communications and
transaction administration. The Partnership Proportionate Share
of the Partnership Merger Expenses for the purposes of this
Agreement, shall be the fraction, the numeration of which is the
Partnerships Net Asset Value and the denomination of which is the
total Net Asset Values of all Partnerships to whom merger offers
are being made by the REIT as listed in the Definitive Consent
Statement. In the event the Limited Partners of the Partnership
do not approve the Merger, the General Partner will pay or
reimburse the Partnership's Proportionate Share of the
Partnership Merger Expenses.
7.10 Indemnification. For a period of six years from and
after the Effective Time, the REIT shall indemnify the partners,
or agents of the Partnership who at any time prior to the
Effective Time were entitled to indemnification under the
Agreement of Limited Partnership of the Partnership existing on
the date hereof to the same extent as such partners or agents are
entitled to indemnification under such Agreement of Limited
Partnership in respect of actions or omissions occurring at or
prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement).
7.11 Survival of the Partnership Obligations; Assumption of
the Partnership Liabilities by the REIT. All of the obligations
of the Partnership that are outstanding at the Closing shall
survive the Closing and shall not be merged therein. Upon the
consummation of the Merger, such obligations shall be assumed,
automatically, by the REIT; provided, however, that such
assumption shall not impose upon or expose the REIT to any
liability for which the Partnership was not liable, and provided,
further, that the REIT shall be entitled to the same defenses,
offsets and counterclaims to which the Partnership would have
been entitled, but for the Merger.
7.12 The REIT Status. From and after the date and until the
Effective Time, neither the REIT nor the Partnership nor any of
their respective Subsidiaries or other affiliates shall (i)
knowingly take any action, or knowingly fail to take any action,
that would jeopardize qualification of the REIT as the REIT
within the meaning of Sections 856 through 859 of the Code; or
(ii) enter into any contract, agreement, commitment or
arrangement with respect to the foregoing.
7.13 Third Party Consents. The REIT and the Partnership
each shall take all necessary corporate and other action and will
use its commercially reasonable efforts to obtain the consents
and applicable approvals from third parties that may be required
to enable it to carry out the transactions contemplated by this
Agreement.
7.14 Efforts to Fulfill Conditions. The REIT and the
Partnership each shall use commercially reasonable efforts to
insure that all conditions precedent to its obligations hereunder
are fulfilled at or prior to the Closing.
7.15 Representations, Warranties and Conditions Prior to
Closing. The REIT and the Partnership each shall use its
commercially reasonable efforts to cause its representations and
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warranties contained in this Agreement to be true and correct on
and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify
the other in writing (i) if any representation or warranty
contained in this Agreement is discovered to be or becomes untrue
or (ii) if the REIT or the Partnership fails to perform or comply
with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to
perform or comply with any of its covenants or agreements
contained in this Agreement.
7.16 Cooperation of the Parties. The REIT and the
Partnership each will cooperate with the other in supplying such
information as may be reasonably requested by the other in
connection with obtaining consents or approvals to the
transactions contemplated by this Agreement.
SECTION 8
CONDITIONS
8.1 Conditions to Each Party's Obligations to Effect the
Merger. The respective obligation of each party to effect the
Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated
hereby shall have been approved in the manner required by the
Charter and Bylaws and Agreement of Limited Partnership of the
REIT and the Partnership, respectively, and by applicable law or
by applicable regulations of any stock exchange or other
regulatory body by the holders of the REIT Shares, the Notes, and
the Partnership Interests entitled to vote thereon.
(b) Neither of the parties hereto shall be subject to
any order or injunction of a court of competent jurisdiction
which prohibits the consummation of the transactions contemplated
by this Agreement. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable
efforts to have any such injunction lifted.
(c) The California Application shall have become
effective and the Definitive Consent Statement shall have been
timely filed and all necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions
contemplated by this Agreement shall have been obtained and no
stop order with respect to any of the foregoing shall be in
effect.
(d) All consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental
commission, board, other regulatory body or third parties
required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made,
except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time and
except where the failure to have obtained or made any such
consent, authorization, order, approval, filing or registration
would not have a material adverse effect on the business, results
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of operations or financial condition of the REIT and the
Partnership (and their respective Subsidiaries), taken as a
whole, following the Effective Time.
8.2 Conditions to Obligations of the Partnership to Effect
the Merger. The obligation of the Partnership to effect the
Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions, unless waived by the
Partnership:
(a) The REIT shall have performed its agreements
contained in this Agreement required to be performed on or prior
to the Effective Time and the representations and warranties of
the REIT contained in this Agreement shall be true and correct in
all material respects as of the Closing Date as if made on the
Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice
President of the REIT, dated the Closing Date, certifying to such
effect.
(b) The Partnership shall have received the opinion of
legal counsel to the REIT, as approved by the Partnership, dated
the Closing Date, to the effect that the REIT met the
requirements for qualification and taxation as a REIT for its
taxable years 1995 through 1997; the REIT's diversity of equity
ownership, operations through the Closing Date and proposed
method of operation for future periods should allow it to qualify
as a REIT for its taxable year ending December 31, 1998; and the
discussion contained under the caption "Material Federal Income
Tax Consequences" in the California Application and the Consent
Statement each accurately reflects existing law and fairly
addresses the material Federal income tax issues described
therein. In rendering its opinion, said counsel shall be entitled
to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of
the Partnership and the REIT and shall be entitled to assume that
the covenants set forth in Section 7 shall be fully complied
with.
(c) From the date of the Agreement through the
Effective Time, there shall not have occurred any change in the
financial condition, business or operations of the REIT and its
Subsidiaries, taken as a whole, that would have or would be
reasonably likely to have the REIT Material Adverse Effect other
than any such change that affects both the Partnership and the
REIT in a substantially similar manner.
(d) The Houlihan Valuation Opinion addressed to the
Partnership shall not have been withdrawn or materially modified.
(e) The Houlihan Fairness Opinion addressed to the
Partnership that the Merger is fair, from a financial point of
view, to the partners of the Partnership shall not have been
withdrawn or materially modified.
(f) The Partnership shall have received the opinion of
legal counsel to the REIT, as approved by the Partnership, dated
the Closing Date, as to such customary matters as the General
Partner may reasonably request, such opinion to be reasonably
satisfactory to the Partnership.
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8.3 Conditions to Obligation of the REIT to Effect the
Merger. The obligations of the REIT to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the
following conditions, unless waived by the REIT:
(a) The Partnership shall have performed its
agreements contained in this Agreement required to be performed
on or prior to the Effective Time and the representations and
warranties of the Partnership contained in this Agreement shall
be true and correct in all material respects as of the Closing
Date as if made on the Closing Date and the REIT shall have
received a certificate of the General Partner or the corporate
general partner if applicable) dated the Closing Date, certifying
to such effect.
(b) The REIT shall have received the opinion of legal
counsel to the Partnership, as approved by the REIT, dated the
Closing Date, to the effect that the consummation of the Merger
will not result in the REIT's failure to continue to satisfy the
requirements for qualification as a REIT for federal income tax
purposes. In rendering its opinion, said counsel shall be
entitled to rely as to any factual matter upon certificates given
by executive officers and other duly authorized representatives
of the REIT and the Partnership and shall be entitled to assume
that the covenants of Section 7 shall be fully complied with.
(c) From the date of this Agreement through the
Effective Time, there shall not have occurred any change in the
financial condition, business or operations of the Partnership
and its Subsidiaries, taken as a whole, that would have or would
be reasonably likely to have a Partnership Material Adverse
Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Bishop-Crown Investment, Inc.,
addressed to the Board of Directors of the REIT that the
consideration to be paid by the REIT pursuant to the Merger is
fair, from a financial point of view, to the REIT shall not have
been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal
counsel to the Partnership, as approved by the REIT, dated the
Closing Date, as to such customary matters as the REIT may
reasonably request, such opinion to be reasonably satisfactory to
the REIT.
(f) The holders of not more than ______% of the REIT
Shares eligible to vote on the merger have not exercised their
dissenters rights.
[(g) The General Partner shall have delivered to the
REIT a written agreement to the effect that it [they] will not
offer to sell, sell or otherwise dispose of any shares of the
REIT Common Stock issued in the Merger, except, in each case,
pursuant to an effective registration statement or in compliance
with Rule 145, as amended from time to time, or in a transaction
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which, in the opinion of legal counsel reasonably satisfactory to
the REIT, is exempt from the registration requirements of the
Securities Act and that the certificates representing the REIT
shares issued to him or her in the Merger may bear a legend to
such effect.]
SECTION 9
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval of this
Agreement by the partners of the Partnership or the shareholders
of the REIT by the mutual written consent of the REIT and the
Partnership.
9.2 Termination By Either the REIT or the Partnership for
Good Reason.
The Merger Agreement may be terminated and the Merger may be
abandoned by action of the General Partner for the Partnership or
the Independent Directors for the REIT only for good reason. Only
the following shall constitute termination for "good reason" for
the purposes of this Agreement.
(i) By either the REIT or the Partnership if the
Merger shall not have been consummated by
December 31, 1998;
(ii) By the REIT if the approval of the Limited
Partners of a Partnership shall not have been
obtained as required under the Merger
Agreement;
(iii) By the Partnership if the approval of
the shareholders of the REIT shall not
have been obtained as required under the
Merger Agreement;
(iv) By either the REIT or the Partnership upon a
Change In Control, as defined below, of the
other;
(v) By either the REIT or the Partnership if
there has been a breach by the other of any
representation or warranty contained in the
Merger Agreement, or if either determines in
good faith that facts or circumstances of
which it had no previous knowledge, which
would have or would be reasonably likely to
have a REIT Material Adverse Effect or a
Partnership Material Adverse Effect, as the
case may be, which breach is not cured within
30 days after written notice of such breach
is given to the breaching party by the
non-breaching party;
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(vi) By either the REIT or the Partnership if
there has been a material breach of any of
the covenants or agreements set forth in the
Merger Agreement by the other, which breach
is not curable or, if curable, is not cured
within 30 days after written notice of such
breach is given to the breaching party by the
non breaching party;
(vii) By the Partnership if in the exercise of
his good faith judgment as to his
fiduciary duties as imposed by law, and
as advised by counsel, the General
Partner determines that such termination
is required by reason of a Partnership
Acquisition Proposal being made;
(viii) By the REIT if, in the exercise of its
good faith judgment as to its fiduciary
duties as imposed by law, and as advised
by counsel, the Independent Directors
determine that such termination is
required by reason of a REIT Acquisition
Proposal being made; or
(ix) By either the REIT or the Partnership if a
United States federal or state court of
competent jurisdiction or United States
federal or state governmental, regulatory or
administrative agency or commission shall
have issued an order, decree or ruling or
taken any other action permanently
restraining, enjoining or otherwise
prohibiting the transactions contemplated by
the Merger Agreement and such order, decree,
ruling or other action shall have become
final and non-appealable, provided that the
party seeking to terminate the Merger
Agreement shall have used all reasonable
efforts to remove such order, decree, ruling
or injunction.
Provided, however, that the terminating party shall not have
breached in any material respect its obligations under the Merger
Agreement in any manner that shall have proximately contributed
to the occurrence of the failure.
For the purposes of this Section 9.2, a "Change in Control"
means (i) the sale or transfer of substantially all of the assets
of the REIT, whether in one transaction or a series of
transactions, except a sale to a successor corporation in which
the stockholders immediately prior to the transaction hold,
directly or indirectly, at least 50% of the total voting power of
the successor corporation immediately after the transaction, (ii)
any merger or consolidation between the REIT and another
corporation immediately after which the stockholders hold,
directly or indirectly, less than 50% of the total voting power
of the surviving corporation, (iii) the dissolution or
liquidation of the REIT, (iv) the acquisition by any person or
group of persons of direct or indirect beneficial ownership of
the REIT's common shares representing more than 50% of the total
REIT Shares then outstanding, or (v) the date the Board Changes.
For the purposes of the foregoing, a "Board Change" means the
date that a majority of the Board is comprised of persons other
than persons (i) whose election or appointment shall have been
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solicited by the General Partner, or (ii) who are serving as
directors appointed by the Board to fill vacancies caused by
death or resignation (but not by removal) or to fill newly
created directorships.
9.3 Effect of Termination and Abandonment
(a) If an election to terminate the Merger Agreement
is made by the Partnership (i) other than for good reason or (ii)
for good reason pursuant to Section 9.2(vii) hereof, and a
Partnership Acquisition Proposal shall have been made and,
within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or
enters into an agreement to consummate a Partnership Acquisition
Proposal to be subsequently consummated, the Partnership shall
pay as liquidated damages (not as a penalty or forfeiture) to the
REIT, provided that the REIT was not in material breach of its
obligations at the time of such termination, an amount equal to
the lesser of (x) the Partnership's Proportionate Share of
$500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of
(1) the maximum amount that can be paid to the REIT without
causing the REIT to fail to meet the requirements of Sections
856(c)(2) and (3) of the Code determined as if the payment of
such amount did not constitute income described in Sections
856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying
Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated
Damages Amount less the amount payable under clause (1) above in
the event the REIT receives a letter from its counsel indicating
that it has received a ruling from the IRS to the effect that
the REIT Liquidated Damages Amount payment constitutes Qualifying
Income. In addition to the REIT Liquidated Damages Amount, the
REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and
expenses incurred by it, up to a maximum of the Partnership's
Proportionate Share of Expenses of the REIT Expenses. The
payments to which the REIT is entitled as described above shall
be its sole remedy with respect to the termination of the Merger
Agreement under the circumstances contemplated above.
(b) If an election to terminate the Merger Agreement
is made because of a Partnership Material Adverse Effect under
Section 9.2(v), the Partnership shall, provided that the REIT was
not in material breach of its obligations at the time of such
termination, pay the REIT for the REIT Expenses, up to a maximum
of the Partnership's Proportionate Share thereof (although it
shall not be required to pay the REIT Liquidated Damages Amount),
which payment of the REIT Expenses shall be the REIT's sole
remedy for termination of the Merger Agreement in such
circumstances.
(c) If an election to terminate the Merger Agreement
is made by the REIT (i) other than for good reason or (ii) for
good reason pursuant to Section 9.2(viii) and, within one year
from the date of such termination, the REIT consummates a REIT
Acquisition Proposal or enters into an agreement to consummate a
REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or
forfeiture) to the Partnership, provided that the Partnership was
not in material breach of its obligations at the time of such
termination. Such liquidated damages shall be in an amount equal
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to 120% of the Partnership's Proportionate Share of the
Partnership Merger Expenses (the "Partnership Liquidated Damages
Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the
termination of the Merger Agreement under the circumstances
contemplated above.
(d) If an election to terminate the Merger Agreement
is made by the Partnership pursuant to Section 9.2(v) because of
REIT Material Adverse Effect, the REIT shall, provided that the
Partnership was not in material breach of its obligations at the
time of such termination, pay the Partnership for the
Proportionate Share of the Partnership Expenses, up to a maximum
amount equal to the amount of the Partnership's Proportionate
Share of the Partnership Merger Expenses and (although it shall
not be required to pay the Liquidated Damages Amount), which
payment shall be the Partnership's sole remedy for termination of
the Merger Agreement in such circumstances.
(e) If the Merger Agreement is terminated by either
party pursuant to Sections 9.2(iv) or (vi), the non-terminating
party shall, provided that the terminating party was not in
material breach of its obligations at the time of such
termination, pay the terminating party (x) in the case of
termination by the Partnership the Partnership Liquidated Damages
Amount, and in the case of termination by the REIT, the REIT
Liquidated Damages Amount, plus (y) an amount equal to the
terminating parties' Proportionate Share of the Merger Expenses
and (z) the non-terminating party shall remain liable to the
terminating party for its breach.
(f) If this Agreement is terminated pursuant to
Section 9.2(i) (as a result of the condition set forth in Section
8.2(c) or Section 9.2(ix) not being satisfied), the REIT shall,
provided that the Partnership was not in material breach of its
obligations hereunder at the time of such termination, pay the
Partnership an amount equal to the Partnership's Proportionate
Share of the Partnership Expenses, which payment shall be the
Partnership's sole remedy for termination of the Agreement in
such circumstances.
(g) If an election to terminate this Agreement is made
pursuant to Section 9.2(i), (ii) or (iii), and a Partnership
Acquisition Proposal or a REIT Acquisition Proposal shall have
been made and, within one year from the date of such termination,
the non-nominating party consummates such Acquisition Proposal
or enters into an agreement to consummate such Acquisition
Proposal which is subsequently consummated, the non-terminating
party shall pay to the terminating party, provided that the
terminating party was not in material breach of its obligations
hereunder at the time of such termination, as liquidated damages
and not as a penalty or forfeiture, an amount equal to (x) in the
case of termination by the Partnership, the Partnership
Liquidated Damages Amount, and in the case of termination by the
REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such
amount, the terminating party shall be entitled to receive from
the non-terminating party (or its successor in interest) all of
its documented out-of-pocket costs and expenses in connection
with this Agreement and the transactions contemplated thereby.
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The payments to which the terminating party is entitled under
this Section 9.3(f) shall be its sole remedy with respect to the
termination of the Agreement under the circumstances contemplated
in this Section 9.3(f).
(h) The REIT and the Partnership agree to amend this
Section 9.3 at the request of the REIT in order to (x) maximize
the portion of the Liquidated Damages Amount that may be
distributed to the REIT hereunder without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of
the Code or (y) improve the REIT's chances of securing a
favorable ruling described in this Section 9.3, provided that no
such amendment may result in any additional cost or expense to
such other party.
(i) In the event of termination of this Agreement and
the abandonment of the Merger pursuant to this Section 9, all
obligations of the parties hereto shall terminate, except the
obligations of the parties pursuant to this Section 9.3 and
Section 7.9 and except for the provisions of Sections 10.3, 10.4,
10.5, 10.6, 10.7, 10.9, 10.10, 10.13, 10.14 and 10.16. In the
event the REIT or the Partnership has received a Liquidated
Damages Amount as provided in this Section 9.3, such recipient
shall not assert or pursue in any manner, directly or indirectly,
any claim or cause of action against the other party hereto or
any of its officers, Independent Directors, or General Partners,
as applicable, based in whole or part upon its or their receipt,
consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination
under Section 9.2(ix) or the exercise by the Partnership of its
right to termination under Section 9.2(viii). Notwithstanding
the foregoing, in the event the REIT or the Partnership is
required to file suit to seek all or a portion of such Liquidated
Damages Amount, and it ultimately succeeds, it shall be entitled
to all expenses, including attorney's fees and expenses, which it
has incurred in enforcing its right hereunder.
(j) If either party willfully fails to perform its
duties and obligations under this Agreement, the non-breaching
party is additionally entitled to all remedies available to it at
law or in equity and to recover its expenses from the breaching
party.
9.4 Extension; Waiver. At any time prior to the Effective
Time, any party hereto, by action taken by the General Partner or
the Board of Directors, as applicable, may, to the extent
legally allowed, (i) extend the time for the performance of any
of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties
made to such party contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
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SECTION 10
GENERAL PROVISIONS
10.1 Nonsurvival of Representations, Warranties and
Agreements. All representations, warranties and agreements in
this Agreement or in any instrument delivered pursuant to this
Agreement shall not survive the Merger; provided, however, that
the agreements contained in Section 4, the last sentence of
Section 7.4 and Sections 7.9, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15
and 7.16 and this Section 10 shall survive the Merger.
10.2 Notices. Any notice required to be given hereunder
shall be in writing and shall be sent by facsimile transmission
(confirmed by any of the methods that follow), courier service
(with proof of service), hand delivery or certified or registered
mail (return receipt requested and first-class postage prepaid)
and addressed as follows:
If to the REIT:
AmREIT, Inc.
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Attention: H. Kerr Taylor, President
Telecopy: (713) 850-0498
If to the Partnership:
[Name of Partnership]
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Attention: ______________________
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so delivered.
10.3 Assignment; Binding Effect; Benefit. Neither this
Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to
the contrary, except as provided in the following sentence,
nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or
by reason of this Agreement. The provisions of Section 4 and
Sections 7.10, 7.12, 7.13, 7.14, 7.15 and 7.16 (collectively, the
"Third Party Provisions") shall benefit the persons identified
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therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 9.
10.4 Entire Agreement. This Agreement, the Exhibits, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the
Partnership Ancillary Agreements, the REIT Ancillary Agreements
and any documents delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement
shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
10.5 Confidentiality
(a) As used herein, "Confidential Material" means,
with respect to either party hereto (the "Providing Party"), all
information (written or oral) furnished (whether before or after
the date hereof) by the Providing Party and its directors,
officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors (collectively,
the "Providing Party Representatives") to the other party hereto
(the "Receiving Party") or such Receiving Party's directors,
officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the
Receiving Party's potential sources of financing for the
transactions contemplated by this Agreement (collectively "the
Receiving Party Representatives") and all analyses, compilations,
forecasts and other studies or other documents prepared by the
Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions
contemplated by this Agreement which contain or reflect such
information. The term "Confidential Material" does not include,
however, information which (i) at the time of disclosure or
thereafter is generally available to and known by the public
other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in
violation of this Agreement, (ii) at the time of disclosure was
available on a nonconfidential basis from a source other than the
Providing Party or the Providing Party Representatives, providing
that such source is not and was not bound by a confidentiality
agreement with the Providing Party, (iii) was known by the
Receiving Party prior to receiving the Confidential Material from
the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its
obligations under this Agreement, or (iv) is contained in any
Partnership Reports or the REIT Reports or Consent
Statement/Prospectus.
(b) Subject to paragraph (c) below or except as
required by law, the Confidential Material will be kept
confidential and will not, without the prior written consent of
the Providing Party, be disclosed by the Receiving Party or its
Representatives, in whole or in part and will not be used by the
Receiving Party or its Representatives, directly or indirectly,
for any purpose other than in connection with this Agreement, the
Merger or the evaluating, negotiating or advising with respect to
a transaction contemplated herein. Moreover, each Receiving Party
agrees to transmit Confidential Material to its Representatives
only if and to the extent that such Representatives need to know
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the Confidential Material for purposes of such transaction and
are informed by such Receiving Party of the confidential nature
of the Confidential Material and of the terms of this Section.
(c) In the event that either Receiving Party, its
Representatives or anyone to whom such Receiving Party or its
Representatives supply the Confidential Material, are requested
or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand,
any informal or formal investigation by any government or
governmental agency or authority or otherwise in connection with
legal processes) to disclose any Confidential Material, such
Receiving Party agrees (i) to immediately notify the Providing
Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the
advisability of taking legally available steps to resist or
narrow such request and (iii) if disclosure of such information
is required, to furnish only that portion of the Confidential
Material which, in the opinion of such Receiving Party's counsel,
such Receiving Party is legally compelled to disclose and to
cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances
that confidential treatment will be accorded the Confidential
Material (it being agreed that the Providing Party shall
reimburse the Receiving Party for all reasonable out-of-pocket
expenses incurred by the Receiving Party in connection with such
cooperation).
(d) In the event of the termination of this Agreement
in accordance with its terms, promptly upon request from either
Providing Party, the Receiving Party shall, except to the extent
prevented by law, redeliver to the Providing Party or destroy all
tangible Confidential Material and will not retain any copies,
extracts or other reproductions thereof in whole or in part. Any
such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising
the same. Notwithstanding the foregoing, each Receiving Party and
one Representative designated by each Receiving Party shall be
permitted to retain one permanent file copy of each document
constituting Confidential Material.
(e) Each party hereto further agrees that if this
Agreement is terminated in accordance with its terms, until one
year from the date of termination, (1) it will not offer to hire
or hire any person currently or formerly employed by the other
party with whom such party has had contact prior hereto other
than persons whose employment shall have been terminated by such
other party prior to the date of such offer to hire or hiring and
(2) neither it nor its affiliates shall directly or indirectly,
(a)(w) solicit, seek or offer to effect or effect, (x) negotiate
with or provide any information to the Board of Directors or
General Partner(s), as applicable, of the other party, or officer
of the other party or any shareholder or partner, as applicable,
of the other party with respect to, (y) make any statement or
proposal, whether written or oral, either alone or in concert
with others, to the Board of Directors or Board of Directors of
the General Partner(s) of the other party, any director, Trust
Manager or officer of the other party or any shareholder or
partner of the other party or any other person with respect to,
or (z) make any public announcement (except as required by law in
respect of actions permitted hereby) or proposal or offer
whatsoever (including, but not limited to, any solicitation of
consents as such terms are defined or used in Regulation 14A of
the Exchange Act) with respect to, (i) any form of business
combination or similar or other extraordinary transaction
-41-
involving the other party or any affiliate thereof, including,
without limitation, a merger, tender or exchange offer or
liquidation of the other party's assets, (ii) any form of
restructuring, recapitalization or similar transaction with
respect to the other party or any affiliate thereto, (iii) any
purchase of any securities or assets, or rights or options to
acquire any securities or assets (through purchase, exchange,
conversion or otherwise), of the other party or any affiliate
thereof, (iv) any proposal to seek representation on the Board of
Directors or the Board of Directors of the General Partner(s), as
applicable, or otherwise to seek to control or influence the
management, Board of Directors or the Board of Directors of the
General Partner(s), as applicable, or policies of the other party
or any affiliate thereof, (v) any request or proposal to waive,
terminate or amend the provisions of this Section 10.5 or (vi)
any proposal or other statement inconsistent with the terms of
this Section 10.5 or (b) instigate, encourage, join, act in
concert with or assist (including, but not limited to, providing
or assisting in any way in the obtaining of financing for, or
acting as a joint or co-bidder for the other party with) any
third party to do any of the foregoing, unless and until such
party has received the prior written invitation or approval of a
majority of the Board of Directors or the General Partner(s), as
applicable, to do any of the foregoing; provided that without
such invitation or approval, either party may at any time, on a
confidential non-public basis, submit to the Chief Executive
Officer of the REIT or the General Partner(s), as applicable, a
proposal to (a) amend any of the provisions of this Section
10.5(e) or (b) effect a business combination or other
extraordinary transaction with the other party providing for the
acquisition of all or substantially all of the assets or the
securities of the other party, including, without limitation, a
merger, tender offer or exchange offer. Each party hereto agrees
that it will not agree with any third party to waive its rights
under this Section 10.5.
10.6 Amendment. This Agreement may be amended by the parties
hereto, by action taken by the Board of Directors or the Board of
Directors of the General Partner(s), as applicable, at any time
before or after approval of this Agreement or any other matter
presented in connection with the Merger by the shareholders of
the REIT and partners of the Partnership, but after any such
approval, no amendment shall be made which by law requires the
further approval of shareholders or partners, as applicable,
without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of
each of the parties hereto.
10.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas
without regard to its rules of conflict of laws. Each of the REIT
and the Partnership hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of
the State of Texas and of the United States District Court,
Southern District of Texas (the "Texas Courts") for any
litigation arising out of or relating to this Agreement and the
transactions contemplated hereby (and agrees not to commence any
litigation relating thereto except in such courts), waives any
objection to the laying of venue of any such litigation in the
Texas Courts and agrees not to plead or claim in any Texas Court
that such litigation brought therein has been brought in an
inconvenient forum.
-42-
10.8 Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all
of the parties hereto.
10.9 Headings. Headings of the Sections of this Agreement
are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
10.10 Interpretation. In this Agreement, unless the
context otherwise requires, words describing the singular number
shall include the plural and vice versa, and words denoting any
gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice
versa.
10.11 Waivers. Except as provided in this Agreement, no
action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action
of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate
or be construed as a waiver of any prior or subsequent breach of
the same or any other provision hereunder.
10.12 Incorporation. The Partnership Disclosure Letter
and the REIT Disclosure Letter and all Exhibits and Schedules
attached hereto and thereto and referred to herein and therein
are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
10.13 Severability. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any current
or future law, and if the rights or obligations of the parties
under this Agreement would not be materially and adversely
affected thereby, such provision shall be fully separable, and
this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a
part thereof, and the remaining provisions of this Agreement
shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a
part of this Agreement, a legal, valid and enforceable provision
as similar in terms to such illegal, invalid or unenforceable
provision as may be possible, and the parties hereto request the
court or any arbitrator to whom disputes relating to this
Agreement are submitted to reform the otherwise illegal, invalid
or unenforceable provision in accordance with this Section 10.13.
10.14 Enforcement of Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance
with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
-43-
and to enforce specifically the terms and provisions hereof in
any Texas Court, this being in addition to any other remedy to
which they are entitled at law or in equity.
10.15 Subsidiaries. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any
corporation, partnership, joint venture, business trust or other
entity, of which such party directly or indirectly owns or
controls at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions
with respect to such corporation or other organization.
10.16 Non-Recourse. Neither the officers, Directors nor
shareholders of the REIT shall be personally bound or have any
personal liability hereunder. The Partnership shall look solely
to the assets of the REIT for satisfaction of any liability of
the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek
recourse or commence any action against any of the shareholders
of the REIT or any of their personal assets, and will not
commence any action for money judgments against any of the
Directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any
obligation of the REIT hereunder or thereunder. The partners of
the Partnership shall not be personally bound or have any
personal liability hereunder. The REIT shall look solely to the
assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary
Agreements to which it is a party. The REIT will not seek
recourse or commence any action against any of the partners of
the Partnership or any of their personal assets, and will not
commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against
any of their personal assets, for the performance or payment of
any obligation of the Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement
and caused the same to be duly delivered on their behalf on the
day and year first written above.
AmREIT, Inc.
____________________________________________________
H. Kerr Taylor, President and Chief Executive Officer
[Name of Partnership]
By: ________________________________________________
Its General Partner
By: ____________________________________________
President
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Form of
AMENDMENT TO THE PARTNERSHIP AGREEMENT
ANNEX 2
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
FORM OF AMENDMENT TO THE PARTNERSHIP AGREEMENT
THIS AMENDMENT TO THE AGREEMENT OF LIMITED PARTNERSHIP (this
"Amendment") of ________________________________ (the
"Partnership") is made and entered into by and among ____________,
a corporation organized under the laws of the state of
_________[and H. Kerr Taylor, the Individual General Partner], as
the general partner[s] of the Partnership (the "General
Partner[s]") and those persons who are listed on Schedule A hereto
as limited partners of the Partnership (the "Limited Partners").
The capitalized terms used within this Amendment shall have the
meanings set forth in the Partnership Agreement (as defined below)
unless otherwise provided herein.
A. The Partnership was formed on ____________________,
199___ under the provisions of the Limited Partnership Act (the
"Act") pursuant to the terms of the (certificate and /or) Agreement
of Limited Partnership entered into on _____________________,
199___ (the "Partnership Agreement").
B. On __________________, 199___, pursuant to the terms of
that certain Joint Proxy Solicitation Statement and Prospectus
dated _______, 1998 (the "Prospectus"), the Limited Partners
holding a majority of the outstanding limited partnership interests
in the Partnership voted for and consented to this Amendment and to
certain transactions resulting in the sale of all of the assets of
the Partnership to AmREIT, Inc., a Maryland corporation ("AmREIT")
affiliated with the General Partner(s), (such transactions being
referred to herein as the "Merger") as described in the Prospectus.
Subject to certain limitations, and depending on the election made
by the Limited Partners in connection with the Merger, the Limited
Partners will receive either Shares of AmREIT or AmREIT's 6.0%
Notes due December 31, 2004 (the "Notes"), as described in the
Prospectus.
C. In accordance with the terms of the Agreement, the
General Partner and the Limited Partners hereby amend the
Partnership Agreement as follows:
1. Definitions. The Agreement shall be amended to
include the following defined terms:
"AmREIT" means AmREIT, Inc., a Maryland corporation.
"Merger" means the transactions resulting in the
statutory merger of the Partnership into AmREIT
under the laws of the state of __________, in the
manner described in the Prospectus.
2. Consummation of the Merger. Notwithstanding
anything to the contrary in the Partnership Agreement, the vote or
written consent given by the Limited Partners holding at least a
majority of the limited partnership interests in the Partnership
(the "Majority Vote of the Limited Partners") shall be sufficient
to authorize and empower the General Partner[s] (i) to cause the
Partnership to transfer all of its assets to AmREIT whether or not
such other corporation or entity is an affiliate of a General
Partner, in the Merger as described in the Prospectus and, (ii) to
cause the Partnership to consummate such Merger transactions in the
manner described in the Prospectus.
3. Distributions and Allocations. The terms of any
document governing the Merger and the transactions relating thereto
described in paragraph 2 above, shall, in regards to the
-1-
distribution of cash or property by, or allocations of income or
loss of, the Partnership to the Limited Partners control, and to
the extent inconsistent with the Agreement, shall constitute an
amendment to the Agreement.
4. General Partner Authorization
(a) Notwithstanding anything to the contrary in the
Agreement, upon the Majority Vote of the Limited Partners, all
transactions between the Partnership and the General Partner[s]
described and contemplated by the Prospectus as necessary or
appropriate to consummate the Merger shall be deemed to be approved
by the Partnership and the Limited Partners.
(b) The General Partner[s] is [are] hereby
authorized, at such time as he [they] in his [their] sole
discretion, deem[s] appropriate, to execute, acknowledge, verify,
deliver, file and record, for and in the name of the Partnership
and Limited Partners, any and all documents and instruments and
shall do and perform any and all acts required by applicable law or
which the General Partner[s] deem[s] necessary or advisable in
order to give effect to this Amendment, to the consummation of the
Merger and each transaction necessary or appropriate to effect the
Merger.
5. Full Force and Effect of Agreement. Except as
provided in this Amendment, all other terms of the Agreement remain
in full force and effect.
6. Successors and Assigns. This Amendment shall be
binding upon, and shall inure to the benefit of, the parties hereto
and their respective successors and assigns.
7. Counterparts. This Amendment may be executed in
counterparts, all of which together shall constitute one agreement
binding on all parties hereto, notwithstanding that all such
parties are not signatories to the original or same counterpart.
8. Governing Law. This Amendment shall be interpreted
in accordance with the laws of the State of ______________, all
rights and remedies being governed by such laws.
IN WITNESS WHEREOF, the undersigned hereby execute this
Amendment on the ____ day of ________________, 19___.
GENERAL PARTNER(S)
By:
LIMITED PARTNERS
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By each Limited Partner listed on
Schedule A hereto
By:
___________________, their
Attorney-in-Fact
-3-
Forms of
THE NOTE AND LOAN AGREEMENT
ANNEX 3
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
SPECIMEN
6.0% UNSECURED CONVERTIBLE NOTE
AMERICAN ASSET ADVISERS TRUST, INC.
NOTE NO. N-_____________ $___________________________
MATURITY DATE: December 31, 2004
DATE OF ISSUANCE: ________, 19__
HOUSTON, TEXAS
THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE LOAN AGREEMENT DATED
_______________ , 1998.
1. Principal and Interest. For value received, AMERICAN
ASSET ADVISERS TRUST, INC., a Maryland corporation ("Maker"),
hereby promises to pay to the order of the registered holder of
this Note ("Holder"), at such address of Holder as is set forth on
the records of Maker, or at such other place as Holder may
designate in writing to Maker, the principal sum of --------------
Dollars ($___________) (hereafter the "Principal"). This Note shall
bear interest from the date hereof on the unpaid Principal balance until
paid at the rate of six and no one hundredths percent (6.0%) per annum.
Interest accruing hereunder shall be calculated on the basis of a 365-day
year for actual days elapsed.
2. Manner and Form of Payment. This Note shall be payable
interest only, in arrears, on the fifth day of ________ and on the
fifth day of each calendar quarter thereafter until December 31,
2005, (the "Maturity Date"), on which date the unpaid balance of
Principal and accrued interest shall be due and payable. All
Principal and interest shall be payable in lawful money of the
United States of America. All payments made hereunder shall be
applied first to the payment of accrued interest and the balance
remaining to the payment of Principal.
3. Loan Agreement. As a condition to the issuance of this
Note, Holder agrees to adopt and to be bound by the terms and
conditions of the Loan Agreement dated __________, 1998 (the "Loan
Agreement"), the terms and conditions of which are incorporated
herein by reference.
4. Events of Default. This Note shall be subject to each of
the Events of Default and remedies set forth in the Loan Agreement.
In order to cure Payment Default, Maker must mail to the Holder, or
direct deposit if that option is selected, the amount of the
nonpayment plus a late payment penalty equal to simple interest on
the amount unpaid at the rate of ten and no one hundredths percent
(10.0%) per annum, measured from the date the payment should have
been mailed, deposited or credited pursuant to the terms of this
Note until the date it actually is mailed, deposited or credited.
-1-
If an Event of Default occurs and is continuing, then and in
every such case the Holders of not less than a Majority in
Principal Amount of the Outstanding Notes may appoint a Trustee to
represent the interest of all the Holders pursuant to the Loan
Agreement as provided therein. No Holder shall have the right to
institute or continue any proceeding, judicial or otherwise, with
respect to the Notes except pursuant to the Loan Agreement.
Under the Loan Agreement, the Trustee, at the direction of the
Majority Vote of the Holders, may declare all the Notes to be due
and payable immediately and take any action allowed by law to
collect such amounts. Notwithstanding the foregoing, in the case
of an Event of Default arising from events of bankruptcy or
insolvency with respect to Maker, all Outstanding Notes will become
due and payable without further action or notice.
5. Conversion
a. This Note will be convertible, in whole but not in
part, at the option of Registered Holder at any time from and after
the date of issuance and prior to its maturity, except if: (i) this
Note is called for redemption at any time from and after the date
of its issuance and prior to its maturity, or (ii) there is a
merger, reorganization, or consolidation involving the REIT or the
REIT sells all or substantially all of its assets (a
"reorganization"), then this Note will be so convertible at any
time prior to the close of business on the fifteenth (15th) day
preceding the Call Date or the date fixed for the consummation of
such reorganization, whichever the case may be.
b. This Note is convertible into fully paid and
nonassessable shares of common stock of the REIT, at the rate of
eleven and fifty one hundredth dollars ($11.50) per share. In
order to exercise the conversion privilege granted, the Registered
Holder will surrender this Note to the REIT with a duly executed
form for conversion hereinafter provided. The REIT shall not be
obligated to issue fractional shares but shall pay in cash such
fractional amount. To the extent the unpaid principal of this Note
is not sufficient to purchase an even multiple of shares under the
terms hereof, Registered Holder shall have the option to purchase
the fraction of a share created by such insufficiency by paying
cash at the rate of $11.50 per share.
c. To convert this Note into shares, Registered Holder
must deliver to the REIT a duly executed Election to Convert,
together with this Note and the additional cash payment, if any, at
the principal business office of the REIT. The REIT will promptly
issue to the holder the shares into which this Note is to be
convertible. Shares of the REIT issued upon the conversion of this
Note will not be entitled to any distribution declared upon such
share(s) prior to the date of the receipt by the REIT of such
Election to Convert and of this Note, and upon such conversion
Registered Holder will not be entitled to any interest on this Note
not due and payable at or prior to the date such Notice is received
by the REIT.
d. This Note will be deemed to have been surrendered
for conversion and converted at the close of business on the date
on which it is received by the REIT or a designated agent of the
REIT with the Election to Convert duly executed, and on such
receipt the REIT will promptly issue and deliver to the person or
persons entitled a certificate or certificates evidencing the
number of shares into which this Note will have been converted.
The REIT will then cancel this Note. The REIT agrees to reserve
for issuance sufficient shares of its authorized but unissued
shares as will be necessary to satisfy its obligation to issue such
shares upon conversion of this Note in accordance with its terms.
-2-
e. The number and kind of securities received upon the
conversion of this Note shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(i) Stock Dividends, Splits. In case the REIT
shall (i) pay a dividend in or make a distribution of its
securities on its outstanding securities in Common Stock,
(ii) subdivide its outstanding Common Stock, (iii)
combine its outstanding Common Stock into a smaller
number of shares of Common Stock, or (iv) issue by
reclassification of its Common Stock other securities of
the REIT, the number and kind of securities issuable upon
the conversion of this Note shall be adjusted so as to
entitle the Registered Holder to receive upon conversion
of the Note the number and kind of securities of the REIT
which the Registered Holder would have owned or would
have been entitled to receive after the happening of any
of the events described above had this Note been
converted immediately prior to the happening of such
event or any record date with respect thereto. Any
adjustment made pursuant to this Section 6(e)(i) shall
become effective on the effective date of such event
retroactive to the record date, if any, for such event.
Except as provided in this Section 6(e), no adjustment
with respect to any dividend shall be made during the
term of this Note or upon the conversion hereof.
(ii) Merger, Reorganization, Re-classification. In
case of any (i) reclassification, capital reorganization
or other change in the outstanding shares of Common Stock
of the REIT (other than a change in par value, or from
par value to no par value, or from no par value to par
value, or as a result of an issuance of Common Stock by
way of dividend or other distribution, or of a
subdivision or combination of the Common Stock); (ii)
consolidation or merger of the REIT with or into another
corporation or entity (other than a merger with a
subsidiary in which merger the REIT is the continuing
corporation and which does not result in any
reclassification, capital reorganization or other change
in the outstanding shares of Common Stock of the REIT) as
a result of which the holders of the REIT's Common Stock
become holders of other shares or securities of the REIT
or of another corporation or entity, or receive cash or
other assets or (iii) sale or conveyance to another
corporation of all or substantially all the property,
assets or business of the REIT, the REIT or such
successor or purchasing corporation, as the case may be,
shall adjust the kind and number of securities and
property which is to be received upon conversion of this
Note so as to entitle the Registered Holder to receive
the kind and number of securities and property which the
Registered Holder would have received or owned after the
happening of such event had this Note been converted
immediately prior to the happening of such event or any
record date with respect thereto. The provisions of this
Section 6(e)(ii) shall similarly apply to successive
reclassifications, capital reorganizations, changes in
the outstanding shares of Common Stock of the REIT,
consolidations, mergers, sales or conveyances.
(iii) Diminimous Adjustments. No adjustment in
the number of securities received upon conversion of this
Note shall be required hereunder unless such adjustment
would require an increase or decrease of at least one
percent (1%) in the number of securities (calculated to
the nearest full share) then to be received upon the
conversion of this Note, provided, however, that any
adjustment which by reason of this Section 6(e)(iii) is
not required to be made immediately shall be carried
forward and taken into account in any subsequent
adjustment.
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(iv) Successor Securities. For the purpose of this
Section 6(e), the term "Common Stock" shall mean: (i) the
class of stock designated as the Common Stock of the REIT
at the date of this Note; or (ii) any other class of
stock resulting from successive changes or
reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par
value, or from no par value to par value. In the event
that at any time, as a result of an adjustment made
pursuant to this Section 6(e), this Note shall become
convertible into any securities of the REIT other than
Common Stock, thereafter the number of such other
securities so purchasable upon the conversion of this
Note shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock
contained in this Section 6(e).
(v) Notice of Adjustment. Whenever the amount of
Common Stock to be received upon the conversion of this
Note is adjusted as herein provided, the REIT shall cause
to be promptly mailed to the Registered Holder by first
class mail, postage prepaid, notice of such adjustment
and a certificate of a firm of independent certified
public accountants selected by the board of directors of
the REIT (who may be the regular accountants employed by
the REIT) setting forth the amount of securities to be
received upon conversion of this Note after such
adjustment, a brief statement of the facts requiring such
adjustment and the computation by which such adjustment
was made.
(vi) No Adjustment for Sales of Securities. No
adjustments shall be made in connection with the public
or private sale and issuance of Common Stock for good and
valuable consideration and at a price determined by the
REIT's board of directors to be fair and reasonable to
the REIT, or the options or warrants issued in connection
therewith, or for any warrants or options outstanding on
the date of this Note or for any Common Stock issuable
upon the exercise of any such warrants or options.
6. Prepayment of Note. The Maker may at any time, upon
not less than thirty (30) nor more than sixty (60) days prior
written notice to the Holder, elect to prepay the Principal Amount
in whole or in part, and by delivering to the Holder payment equal
to such amount of prepayment plus accrued and unpaid interest
thereon through such date of prepayment. Notice of prepayment
shall be mailed by first class mail to Holder. If less than all
Notes are prepaid, the Notes may be redeemed either pro rata or by
lot in the sole discretion of the Maker. In the event of such
prepayment, a new Note in principal amount equal to the unpaid
principal amount of the original Note shall be issued in the name
of Holder and the original Note shall be canceled. On and after
the prematurity date, interest shall cease to accrue on the portion
of the Principal Amount prepaid. The foregoing obligation to
prepay the Notes either on a pro rata basis or by lot shall not in
any manner limit the Maker's right to repurchase or prepay any Note
on a voluntary basis agreed to by the holder thereof, including any
prepayment of the Note prior to maturity as described below.
7. Amendment, Supplement and Wavier. Pursuant to the Loan
Agreement, the Notes may be amended or supplemented by a Majority
Vote of the Holders and any Default, Event of Default, compliance
or noncompliance with any provision of the Notes may be waived by
a Majority Vote of the Holders, provided that any such amendment or
supplement affecting the term, interest rate and other terms of the
Notes must be ratable and proportionate in effect on all Holders of
the then outstanding Notes based on the aggregate amount of
principal and interest and penalty payments due them.
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8. Waivers. The Maker waives demand for payment,
presentment for payment, protest, notice of protest, notice of
dishonor, notice of nonpayment, notice of acceleration or maturity,
or diligence in taking any action to collect sums owing hereunder.
9. Separability. In case any provision in this Note shall
be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
10. Texas Law; Jurisdiction. This Note is made in the State
of Texas and the provisions hereof shall be construed in accordance
with the laws of the State of Texas, except to the extent preempted
by federal law; and such parties further agree that in the event of
a default hereunder, this Note may be enforced in any court of
competent jurisdiction in the State of Texas, and they do hereby
submit to the jurisdiction of such court regardless of their
residence or where this Note or any endorsement hereof may have
been executed.
AMERICAN ASSET ADVISERS TRUST, INC.
By: _____________________________________
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LOAN AGREEMENT
6.0% Unsecured Convertible Notes
Due December 31, 2004
AMERICAN ASSET ADVISERS TRUST, INC.
THIS LOAN AGREEMENT is entered into by and among AMERICAN
ASSET ADVISERS TRUST, INC., a Maryland corporation, (hereinafter
referred to as the "REIT") and the undersigned, a Registered Holder
of one or more of AmREIT's 6.0% Unsecured Convertible Notes, as
defined below (each of whom is referred to herein as "Holder" and
together referred to as "Holders") and such Trustee or Trustees as
may be appointed by the Holders pursuant to the terms set forth
herein.
PREFACE
A. The Notes are part of up to $_____________ of 6.0%
Unsecured Convertible Notes due December 31, 2004, which are being
offered and sold by AmREIT to the Holders, pursuant to the Merger
of one or more of the Participating Partnerships into AmREIT
(collectively referred to herein as the "Merger") as described in
the Joint Proxy Solicitation Statement and Prospectus dated
_____________, 1998, as supplemented (the "Prospectus"). Unless
otherwise defined herein, the terms used herein have the same
meanings as those set forth in the Prospectus, which is
incorporated herein by reference.
B. The Holder is a Registered Holder of one or more of the
Notes.
C. A copy of the form of the Notes is set forth as Exhibit
"A" to this Agreement.
D. By electing to receive his or her Note(s) in the Merger
and as a condition thereto, the Holder has adopted and agreed to be
bound by this Loan Agreement.
E. By adopting and agreeing to be bound by this Agreement,
the Holder appoints the Trustee, as such Trustee or Trustees may be
appointed pursuant to Article III, Section B below, to act as
Holder's exclusive agent under this Agreement for the sole purposes
of providing the services and performing the duties specified in
Article IV of this Agreement, and of enforcing the obligations of
AmREIT under the Notes as provided herein. The Agent understands
the purposes of its appointment as Holder's agent and accepts the
appointment as such for the stated purposes only, and on the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the agreements contained
herein and for other good and valuable consideration, the adequacy
of which is hereby acknowledged, AmREIT, the Holders and the
Trustee mutually agree as follows:
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ARTICLE I
Definitions and Other Provisions of General Application
Section A. Definitions
For the purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires, the
capitalized terms used herein and not otherwise defined in this
section have the meaning assigned to them in the Prospectus and
include the plural as well as the singular. All accounting terms
not otherwise defined herein have the meanings assigned to them in
the Prospectus and all computations herein provided for shall be
made in accordance with generally accepted accounting principles.
In determining generally accepted accounting principles, AmREIT may
conform to any other rule or regulation of any regulatory authority
having jurisdiction over AmREIT.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person. For
purposes of this definition, "control," "controlling" and
"controlled," when used with respect to any specified Person, means
the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this instrument as originally executed or as
it may from time to time be supplemented, modified or amended by
one or more supplemental agreements hereto entered into pursuant to
the applicable provisions hereof. The Agreement is not qualified
under or subject to the Trust Indenture Act of 1939, as amended.
"Bankruptcy" or "Insolvency" means the filing in any court
pursuant to any statute of the United States or of any state, a
petition in bankruptcy or insolvency, or filing for reorganization
or for the appointment of a receiver or trustee of all or a
material portion of AmREIT's assets, an assignment for the benefit
of creditors, if AmREIT admits in writing its inability to pay its
debts as they fall due or the seeking, consenting to, or
acquiescing in the appointment of a trustee, receiver or liquidator
of any material portion of its property. Bankruptcy or insolvency
shall also include the filing against AmREIT, in any court,
pursuant to any statute of the United States or of any state, of a
petition in bankruptcy or insolvency, or for reorganization, or for
appointment of a receiver or trustee of all or a substantial
portion of AmREIT's property, and within 90 days after such
commencement of any such proceeding against AmREIT such petition
shall not have been dismissed.
"Business Day" means any day other than a Saturday or Sunday
or a day on which banking institutions in the State of Texas are
not required to be open.
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"Default" means any event that with the passage of time or the
giving of notice or both is or could be an Event of Default.
"Events of Default" means those Events of Default defined
under "Events of Default" herein, whatever the reason for such
event and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or
order of any court or any order, rule or regulation of any
administrative or governmental body.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Holder" means the Person or Persons in whose name a Note is
registered on the books and records of AmREIT as a holder of the
Note.
"Indebtedness" means any indebtedness, whether or not
contingent, (i) in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or credit (or
reimbursement agreements in respect thereof), (ii) representing the
balance deferred and unpaid of the purchase price of any property,
(iii) representing capital lease obligations; and (iv) representing
any hedging obligations, except, in each case, any such balance
that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing Indebtedness (other than hedging
obligations) would appear as a liability upon a balance sheet
prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the guarantee of obligations of other
persons that would be included within this definition.
"Majority in Interest" or "Majority of Principal Amount" shall
mean a majority of the outstanding unpaid principal amount of all
Outstanding Notes plus all unpaid interest due thereon (as
reflected on the books and records of AmREIT as voted by the
Holders thereof).
"Maturity Date" means the date on which the unpaid balance of
principal and accrued interest is due and payable on the Notes.
"Net Income" means, with respect to AmREIT for any period, the
aggregate of the net income of AmREIT for such period, on a
consolidated basis, determined in accordance with GAAP; provided
that the Net Income of any entity that is not a subsidiary of
AmREIT or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid to the referent entity or a wholly-owned
subsidiary of AmREIT.
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"Outstanding Notes" when used with respect to the Notes means,
as of the date of determination, all Notes theretofore issued and
delivered by AmREIT and not paid, prepaid or redeemed in full
pursuant to their terms.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock partnership, trust,
unincorporated organization or government or any agency or
political subdivision thereof.
"Trustee" means the Person or Persons elected as the "Trustee"
pursuant to the terms of this Agreement or a successor thereto once
the latter shall have become such pursuant to the applicable
provisions of this Agreement.
Section B. Acts of Holders
1. Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Agreement to be
given or taken by Holders may be embodied in and evidenced by one
or more substantially concurrent instruments of substantially
similar tenor signed by such Holders in person or by an agent or
attorney duly appointed in writing; and, except as herein otherwise
expressly provided, such action shall become effective when such
instrument or instruments are delivered to the Trustee, and, where
it is herein expressly required, to AmREIT. Such instrument or
instruments (and the action embodied therein and evidenced thereby)
are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments.
2. The ownership of the Notes shall be conclusively proven
by the books and records of AmREIT.
3. Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of a Note shall bind
every future Holder of the Note and the Holder of every Note issued
upon the transfer thereof or in exchange therefor or in lieu
thereof, in respect of anything done or suffered to be done by the
Trustee or AmREIT in reliance thereon, whether or not notation of
such action is made upon such Note.
Section C. Notices to Trustee and AmREIT
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or
permitted by this Agreement to be made upon, given or furnished to,
or filed with:
1. The Trustee by any Holder or by AmREIT shall be
sufficient for every purpose hereunder if given in writing by
personal service or mailed by certified mail, return receipt
requested, addressed to the Trustee at the address provided to the
Holder by the Trustee in writing, or
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2. AmREIT by the Trustee or by any Holder shall be
sufficient for every purpose hereunder if given in writing by
personal service or mailed by certified mail, return receipt
requested, addressed to AmREIT at Eight Greenway Plaza, Suite 824,
Houston, Texas 77046, Attention: Timothy Kelley, Vice President, or
at any other address previously furnished in writing to the Trustee
by AmREIT.
Section D. Notices to Holders
Where this Agreement provides for publication of notice to
Holders of any event, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and
mailed, first-class postage prepaid, to each Holder of the Notes,
at the address of such Holder as it appears in the books and
records of AmREIT, not later than the latest date, and not earlier
than the earliest date, prescribed for the first publication of
such notice.
Section E. Effect of Headings and Table of Contents
The Article and Section headings herein are for convenience
only and shall not affect the construction hereof.
Section F. Successors and Assigns
All covenants and agreements in this Agreement by AmREIT shall
bind its successors and assigns, whether so expressed or not.
Section G. Severability
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or
impaired thereby.
Section H. Benefits of Agreement
Nothing in this Agreement or in the Notes, expressed or
implied, shall give to any Person, other than the parties hereto
and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.
Section I. Governing Law
This Agreement and all rights and obligations of the
undersigned hereof shall be governed, construed and interpreted in
accordance with the laws of the State of Texas without regard to
conflict of law principles.
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Section J. Persons Deemed Owners
AmREIT, the Trustee and any agent of AmREIT or the Trustee may
treat the Person in whose name any Note is registered as the owner
of such Note for the purpose of receiving payment of principal of
or interest on such Note and for all other purposes whatsoever,
whether or not such Note is overdue.
ARTICLE II
Continuing Covenants of AmREIT
Section A. Continuing Covenants of AmREIT
1. No Default on Other Debt. AmREIT shall not be in default
with respect to any other of its debt obligations, including any
payment of principal or interest. For the purposes hereof,
"default" means AmREIT's failure to cure any default under the
terms of any debt obligation within thirty (30) days of written
notice of such default by the creditor under the respective debt
obligation.
2. Merger, Reorganization or Sale of Assets. While any Note
remains unpaid and outstanding, AmREIT shall not consolidate or
merge with or into any other person or entity (whether or not
AmREIT is the surviving corporation) or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of
its properties or assets (excepting loans held for sale in the
normal course of AmREIT's mortgage banking operations) in one or
more related transactions to, another corporation, person or
entity, unless (i) AmREIT is the surviving corporation of such
consolidation or merger; and (ii) immediately after such
transaction no Default or Event of Default exists.
3. Prepayment of Notes. During the time any Principal is
due and owing on the Notes, AmREIT shall apply an amount equal to
eighty percent (80%) of the net proceeds from the sale or
refinancing of the real properties acquired from the Participating
Partnerships pursuant to the Merger as described in the Prospectus
to prepay (call) the Notes as provided above. Such prepayment may,
in the sole discretion of AmREIT, be either pro rata as to the
outstanding principal amount of all of the Notes or be used to
prepay less than all of the outstanding Notes in full where the
Notes to be prepaid are determined by lot. For the purposes of
this covenant (the "Prepayment Requirement"), "net proceeds from
sale or refinancing" shall mean any cash proceeds received from the
sale or financing of such real property remaining after the payment
of the costs of such transaction, the payment of all encumbrances
or obligations relating to the real property and the payment of any
other debt obligations of AmREIT then due and payable or which
AmREIT's Board of Directors determines to be in the best interests
of AmREIT to prepay.
4. Books and Records. AmREIT shall keep proper books of
record and account, in which full and correct entries shall be made
of all dealings or transactions of or in relation to the Notes and
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the business and affairs of AmREIT in accordance with generally
accepted accounting principles. AmREIT shall furnish to the
Trustee any and all information related to the Notes as the Trustee
may reasonably request and which is in AmREIT's possession.
ARTICLE III
Remedies
Section A. Events of Default
Each of the following constitutes an Event of Default under
the Notes: (i) default for thirty (30) days in the payment when due
of interest or penalty on any Note; (ii) default for thirty (30)
days in the payment when due of principal of any Note; (iii) if not
cured in a timely manner, failure by AmREIT to observe or perform
any of the covenants or agreements in the Notes or set forth under
Article II hereof required to be performed by it; (iv) if not
cured in a timely manner, default under the instruments governing
any Other Indebtedness or any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Other Indebtedness for money borrowed by AmREIT,
whether such Other Indebtedness or guarantee now exists or is
hereafter created, which default (a) is caused by a failure to pay
when due principal or interest on such Other Indebtedness within
the grace period provided in such Other Indebtedness and which
continues beyond any applicable grace period (a "Payment default")
or (b) results in the acceleration of such Other Indebtedness prior
to its express maturity, provided in each case the principal amount
of any such Other Indebtedness, together with the principal amount
of any other such Other Indebtedness under which there has been a
Payment default or the maturity of which has been so accelerated,
aggregates $250,000 or more or (v) AmREIT's bankruptcy or
insolvency.
In order to cure payment Default, AmREIT must mail to the
Holder, direct deposit or credit if that option is selected, the
amount of the nonpayment plus a late payment penalty equal to
simple interest on the amount unpaid at the rate of 10% per annum,
measured from the date the payment should have been mailed,
deposited or credited pursuant to the terms of the Notes until the
date it actually is mailed, deposited or credited.
Section B. Appointment of Trustee and Commencement of
Operation of the Trust
If an Event of Default occurs and is continuing, then and in
every such case the Holders of not less than a Majority in
Principal Amount of the Outstanding Notes by written and signed
ballot or other written and signed consent may, within thirty (30)
days of such Event of Default, appoint a Trustee. Upon delivery of
the properly executed written instrument evidencing the appointment
of the Trustee and the latter's acceptance of such appointment by
due execution of this specific and exact form of Agreement, the
operation of this Trust shall commence and the power and rights of
the Trustee hereunder shall begin.
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Section C. Covenant to Pay Trustee Amounts Due on Notes and
Right of Trustee and Holders of Judgment
AmREIT covenants that, if an Event of Default has occurred and
is continuing, AmREIT will, upon written request of the Trustee,
cure such default and pay forthwith for the benefit of the Holders
the whole amount then due, any penalties which may be due and, in
addition thereto, such further amount as shall be sufficient to
cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel and all other amounts due to
the Trustee hereunder. If AmREIT fails to cure such defaults and
pay such amounts forthwith upon such demand, the Trustee, in its
own name and as trustee of an express trust, shall be entitled to
sue for and recover judgment against AmREIT and any other obligor
on the Notes for the amount so due and unpaid pursuant to the terms
of the Notes.
If any Event of Default occurs and is continuing, the Trustee
or the Holders of not less than a Majority in Principal Amount of
the then Outstanding Notes may declare all the Notes to be due and
payable immediately and take any action allowed by law to collect
such amounts. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or
insolvency with respect to AmREIT, all Outstanding Notes will
become due and payable without further action or notice.
The Trustee may withhold from the Holders notice of any
Default or Event of Default if it believes that withholding notice
is in their interest, except a Default or Event of Default relating
to the payment of principal, interest or penalties.
Section D. Application of Money Collected
Any money collected by the Trustee pursuant to this Article,
together with any other sums then held by the Trustee hereunder,
shall be applied in the following order, at the date or dates fixed
by the Trustee and, in case of the distribution of such money on
account of principal or interest upon presentation of the Notes,
and the notation thereof of the payment if only partially paid and
upon surrender thereof if fully paid:
(i) First: To the payment of all unpaid amounts due to
the Trustee hereunder;
(ii) Second: To the payment of the whole amount then due
and unpaid on the Outstanding Notes, for principal and
interest and any penalties which may be due under the terms of
the Notes, in respect of which or for the benefit of which
such money has been collected; and in case such proceeds shall
be insufficient to pay in full the whole amount so due and
unpaid on such Notes, then to the payment of such principal
and interest and without any preference or priority, ratably
according to the aggregate amount so due; and
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(iii) Third: To the payment of the remainder, if any,
to AmREIT or to whosoever may be lawfully entitled to receive
the same or as a court of competent jurisdiction may direct.
Section E. Trustee May File Proofs of Claim
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment,
composition or other judicial proceeding relative to AmREIT or any
other obligor upon the Notes or the property of AmREIT or of such
other obligor or their creditors, the Trustee (irrespective of
whether the principal of the Notes shall then be due and payable,
as therein expressed or by declaration or otherwise, and
irrespective of whether the Trustee shall have made any demand on
AmREIT for the payment of overdue principal or interest) shall be
entitled and empowered, by intervention in such proceeding or
otherwise,
(i) To file and prove a claim for the whole amount of
principal, interest and penalty owing and unpaid in respect of
the Outstanding Notes and to file such other papers or
documents as may be necessary or advisable in order to have
the claims of the Trustee (including to the extent permitted
by law any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel) and of the Holders allowed in such judicial
proceeding, and
(ii) To collect and receive any monies or other property
payable or deliverable on any such claims and to distribute
the same;
and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such
payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, and any other amounts due the Trustee under
this Agreement.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of
any Holder any plan or reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the
claim of any Holder.
Section F. Trustee May Enforce Claims Without Possession of
Notes
All rights of action and claims under this Agreement, or
documents related thereto, may be prosecuted and enforced by the
Trustee without the possession of any of the Notes or the
production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own
name as trustee of an express trust. Any recovery of judgment
shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee,
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its agents and counsel and all other amounts due to the Trustee
hereunder, be for the ratable benefit of the Holders of the Notes
(based on the aggregate amount of unpaid principal and interest due
each such Holder on such date) in respect of which such judgment
has been recovered.
Section G. Limitation on Suits
DURING THE PERIOD OF THE OPERATION OF THIS AGREEMENT, NO
HOLDER SHALL HAVE ANY RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING
or judicial action pursuant to Articles II and III above or
otherwise, under or with respect to this Agreement or the Notes, or
for the appointment of a receiver or trustee or for any other
remedy hereunder, unless all of the following have occurred:
(i) Such Holder has previously given written notice to
the Trustee of a continuing Event of Default;
(ii) The Holders of not less than a Majority in Principal
Amount of the Outstanding Notes shall have made written
request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee hereunder;
(iii) Such Holder has offered to the Trustee
indemnity reasonably acceptable to the Trustee against the
costs, expenses and liabilities to be incurred in compliance
with such request and provided security therefor reasonably
acceptable to the Trustee;
(iv) The Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute
any such proceeding; and
(v) No written direction inconsistent with such written
request has been given to the Trustee during such 60-day
period by the Holders of a Majority in Principal Amount of the
Outstanding Notes;
it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or
pursuant to any provision of this Agreement to affect, disturb or
prejudice the rights created under this Agreement or the rights of
any other Holders of Notes, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any
right under this Agreement, except in the manner herein provided
and for the equal and ratable benefit of all Outstanding Note
Holders. No Holder shall have the right and each Holder hereby
waives the right to sue individually except in accordance with the
provisions of this Agreement.
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Section H. Rights to Settle or Compromise
A Trustee may not make any settlement or compromise concerning
the rights of Holders, including in regard to payments of principal
or interest, unless it is approved in a separate vote by a
Majority in Interest of the Holders. Any settlement or compromise
so approved would be binding upon all the Holders.
Section I. Rights and Remedies Cumulative
Except insofar as same shall contradict the express terms of
this Agreement, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy
shall, to the extent permitted by law and the terms of this
Agreement, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in
equity or otherwise.
Section J. Delay or Omission not Waiver
No delay or omission of the Trustee or of any Holder of any
Note to exercise any right or remedy accruing upon an Event of
Default shall impair any such right or remedy or constitute a
waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Agreement or by law to the
Trustee or to the Holders may be exercised from time to time, and
as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
Section K. Waiver of Past Defaults
Before any judgment or decree for payment of money due has
been obtained by the Trustee as provided in this Article, the
Holders of not less than a Majority in Principal Amount of the
Outstanding Notes may, by Act of such Holders delivered to the
Trustee and AmREIT, on behalf of the Holders of all the Notes waive
any past default hereunder and its consequences and settle or
compromise any claim related to the payment of principal and
interest on the Outstanding Notes, provided the terms of such
settlement or compromise have been made known to all Holders of
Outstanding Notes and the approval of the Majority in Interest has
been made in a signed written document. If and only if required by
law, the Trustee may provide a procedure for any Holder so desiring
to remove itself from the group settlement and to allow the Holder
opting out of the group settlement to proceed to enforce its rights
individually and as it sees fit.
Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been
cured, for every purpose of this Agreement; but no such waiver
shall extend to any subsequent or other Default or impair any right
consequent thereon.
-11-
Section L. Notice of Defaults
As soon as practicable after the occurrence of any Event of
Default hereunder, AmREIT shall transmit notice thereof by mail to
all Holders of Notes, as their names and addresses appear on the
books and records of AmREIT.
ARTICLE IV
The Trustee
Section A. Certain Duties and Responsibilities
1. The Trustee shall, in the exercise of the rights and
powers vested in it by this Agreement, use the same degree of care
and skill in its exercise as a reasonable person would exercise or
use.
2. No provision of this Agreement shall be construed to
relieve the Trustee from liability for its own grossly negligent
action, its own grossly negligent failure to act, or its own
willful misconduct, except that:
a. The Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of a Majority in
Principal Amount of the Outstanding Notes relating to the time,
method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power
conferred upon the Trustee, under this Agreement;
b. No provision of this Agreement shall require the
Trustee to advance, expend or risk its own funds or otherwise incur
any financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers;
c. The Trustee shall be presumed to have acted without
negligence if it acted, or omitted to act, in good faith and in
reliance upon an opinion of counsel obtained by it.
Section B. Certain Rights of Trustee
Except as otherwise provided below:
1. The Trustee may consult with counsel, accountants and
other experts and the advice or opinion of such counsel,
accountants and other experts shall be full and complete
authorization and protection in respect of any action taken,
suffered or omitted by the Trustee hereunder in good faith and in
reliance thereon and the Trustee shall have the right at any time
to seek instructions from a court of competent jurisdiction;
-12-
2. The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Agreement at the
request or direction of any of the Holders pursuant to this
Agreement, unless such Holders shall have offered to the Trustee
security or indemnity reasonably acceptable to the Trustee against
the costs, expenses and liabilities which might be incurred by it
in compliance with such request or direction;
3. The Trustee may execute any of the powers hereunder or
perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for
any misconduct or negligence on the part of any agent or attorney
appointed by it hereunder with the care required below; and
4. Anything to the contrary contained herein
notwithstanding, the Trustee shall have no duty to take any action
whatsoever if it believes in good faith that the taking of such
action may expose the Trustee to personal liability.
Section C. May Hold Notes
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with AmREIT
with the same rights it would have if it were not Trustee.
Section D. Compensation, Reimbursement and Security Therefor
AmREIT agrees:
1. To pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder;
2. To reimburse the Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by
the Trustee in accordance with any provision of this Agreement,
including reasonable fees and expenses of counsel for the Trustee,
except as such expense, disbursement or advance may be attributable
to the Trustee's gross negligence or bad faith;
3. To indemnify the Trustee for, and to hold it harmless
against any loss, liability or expense incurred without gross
negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this trust,
including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance
of any of its powers or duties hereunder.
Section E. Trustee Eligibility
The Trustee may not be an Affiliate of AmREIT.
-13-
Section F. Termination of Trust and Removal of Trustee,
Appointment of Successor
1. Upon the moment all Defaults or Events of Defaults are
cured or deemed cured pursuant to this Agreement, the appointment
of the Trustee and the operation of the Trust will terminate and
the powers and the rights of the Trustee hereunder shall cease
forthwith.
2. No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall
become effective until the acceptance of appointment by the
successor Trustee as provided herein.
3. The Trustee may resign as Trustee hereunder at any time
by giving written notice thereof to AmREIT and the Holders. Upon
delivery of an instrument of acceptance by a successor Trustee duly
appointed by a Majority in Interest of the Holders the resignation
will become effective.
4. The Trustee may be removed as Trustee hereunder at any
time by Act of the Holders of a Majority in Principal Amount of the
Notes, delivered to the Trustee and to AmREIT.
5. If at any time:
a. The Trustee shall cease to be eligible as Trustee
and shall fail to resign after written request therefor by AmREIT
or by any Holder, or
b. The Trustee shall be adjudged incompetent, bankrupt
or insolvent or a receiver of the Trustee or of its property shall
be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation;
then in any such case, any Holder may, on behalf of himself and all
others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of
a successor Trustee.
Section G. Acceptance of Appointment by Successor
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to AmREIT and to the retiring Trustee an
instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become
effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers and
duties of the retiring Trustee under this Agreement.
No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be
qualified and eligible under this Article.
-14-
ARTICLE V
Holder's Lists and Reports by Trustee and AmREIT
Section A. AmREIT to Furnish Trustee Lists of Holders
AmREIT will furnish or cause to be furnished to the Trustee
not more than five (5) days after its appointment and acceptance as
Trustee, and at such other times as the Trustee may reasonably
request in writing, within ten (10) business days after receipt by
AmREIT of any such request, a list in such form as the Trustee may
reasonably request containing all the information in the possession
or control of AmREIT, or any of its paying agents, as to the names
and addresses of the Holders of Notes, obtained since the date as
of which the next previous list, if any, was furnished, and the
status of the amount of principal and interest paid or outstanding
in respect of each Notes.
ARTICLE VI
Supplemental Agreements
Section A. Supplement Agreement Without Consent of Holders
Without the consent of the Holder of any Note, AmREIT, when
authorized by a board resolution, and the Trustee may from time to
time enter into one or more agreements supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
1. To add to the conditions, limitations and restrictions on
the authorized amount or purposes of issue, authentication and
delivery of Notes, as herein set forth, additional conditions,
limitations and restrictions thereafter to be observed; provided
that any such modification does not adversely affect the rights and
interests of the Holders.
2. To evidence the succession of another corporation or
entity to AmREIT and the assumption by any such successor of the
covenants of AmREIT contained herein; or
3. To add to the covenants of AmREIT for the benefit of the
Holders or to surrender any right or power herein conferred upon
AmREIT; or
4. To cure any ambiguity, to amend any provision herein
which may be inconsistent with any other provision herein or to
make any other provisions, with respect to matters or questions
arising under this Agreement, which shall not be inconsistent with
the provisions of this Agreement, provided such action shall not
adversely affect the rights and interests of the Holders.
-15-
Section B. Supplemental Agreements with Consent of Holders
With the consent of the Holders of not less than a Majority in
Principal Amount affected by such agreement or supplemental
agreement, by Act of such Holders delivered to AmREIT and the
Trustee, AmREIT and the Trustee may enter into an agreement or
agreements supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the
rights of the Holders of the Notes under this Agreement. Such
agreement or supplemental agreement may, with the consent of a
Majority in Interest of the Holders of each Outstanding Note
affected thereby, effect a compromise or settlement affecting the
term, interest rate and other terms of all the Notes; provided that
any such compromise or settlement must be ratable and proportionate
in effect on all Outstanding Notes based on the aggregate amount of
principal and interest and penalty payments due them under the
terms of such Notes as of the date of settlement.
The Trustee may in its discretion determine whether or not any
Notes would be affected by any supplemental agreement and any such
determination shall be conclusive upon the Holders of all Notes,
whether theretofore or thereafter authenticated and delivered
hereunder. The Trustee shall not be liable for any such
determination made in good faith.
It shall not be necessary for any Act of Holders under this
section to approve the particular form of any proposed supplemental
agreement, but it shall be sufficient if such Act shall approve the
substance thereof.
Section C. Effect of Supplemental Agreements
Upon the execution of any supplemental agreements under this
Article, this Agreement shall be modified in accordance therewith
and such supplemental agreement shall form a part of this Agreement
for all purposes; and every Holder theretofore or thereafter
authenticated and delivered hereunder shall be bound thereby.
ARTICLE VII
Defeasance
Section A. Payment of Indebtedness, Satisfaction and Discharge
of Agreement.
Whenever AmREIT has paid or caused to be paid all amounts then
currently due and payable pursuant to the terms of the Notes then
this Agreement and the rights and interests created hereby shall
cease and become null and void (except as to any surviving rights
of transfer or exchange of Notes herein or therein provided for and
except as otherwise stated in the next paragraph) and the Trustee
then acting as such hereunder shall, at the expense of AmREIT,
execute and deliver such instruments of satisfaction and discharge
as may be necessary.
-16-
Notwithstanding anything to the contrary herein contained, the
obligations of AmREIT to pay or reimburse the Trustee as provided
herein shall survive the termination, satisfaction and discharge of
this Agreement.
ARTICLE VIII
Miscellaneous
Section A. Counterparts
This Agreement may be executed in several counterparts, all of
which together shall constitute one agreement binding on all
parties hereto, notwithstanding that all the parties have not
signed the same counterpart. The Holders have consented hereto and
are bound hereto by executing an agreement to be bound hereby
contained in the subscription document related to the offering of
the Notes.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the ____ day of __________, 1998.
HOLDER: AmREIT
By their election to receive Notes, American Asset Advisers Trust, Inc.
each Holder has irrevocably adopted A Maryland Corporation
and agreed to be bound by the terms
and conditions of this Loan Agreement.
By: _____________________________
TRUSTEE
__________________________________
Name
By: ____________________________
Print Name and Title
-17-
Form of
BISHOP-CROWN FAIRNESS OPINION
ANNEX 4
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
Board of Directors
American Asset Advisers Trust, Inc.
Eight Greenway Plaza, Suite 824
Houston, TX 77046 ________, 1998
Gentlemen:
We understand that American Asset Advisers Trust, Inc., a
Maryland corporation ("AmREIT"), Taylor Income Investors III, Ltd.
("FUND III"), Taylor Income Investors IV, Ltd. ("FUND IV"), Taylor
Income Investors V, Ltd. ("FUND V"), Taylor Income Investors VI,
Ltd. ("FUND VI"), AAA Net Realty Fund VII, Ltd. ("FUND VII"), AAA
Net Realty Fund VIII, Ltd. ("FUND VIII"), AAA Net Realty Fund
Goodyear, Ltd. ("AAA GDYR"), AAA Net Realty Fund IX, Ltd. ("FUND
IX"), AAA Net Realty Fund X, Ltd. ("FUND X"), and AAA Net Realty
Fund XI, Ltd. ("FUND XI"), (each, a "Partnership" and collectively
the "Partnerships"), propose to enter into ten separate merger
agreements (collectively, the "Merger Agreements") pursuant to
which, among other things, each Partnership will merge into AmREIT
and all of the properties and cash assets of the Partnerships will
be merged with an into AmREIT (the "Merger").
The partnership interests of the Partnerships issued and
outstanding prior to the closing of the Merger will be converted
into the right to receive up to 3,021,296 shares of common stock,
$0.01 par value per share (the "Shares"). The aggregate number of
Shares to be issued to the partners of each Partnership in
connection with the Transaction shall be equal to the Net Asset
Value for such Partnership (agreed upon by AmREIT and the
Partnership) divided by $9.34 (the "Total Shares per Partnership").
The number of shares of Common Stock to be received by a limited
partner of each Partnership shall be equal to such partner's
respective percentage interest in the individual Partnership
multiplied by the Total Shares per Partnership for such
Partnership. The general partners will not receive any shares to
which they may be entitled in exchange for the general partner
interest except with respect to their unsubordinated interest as
General Partner.
You have asked us whether, in our opinion, the consideration
to be paid by AmREIT pursuant to the Transaction is fair to AmREIT
from a financial point of view.
In conducting our analysis and arriving at the opinion set
forth below, we have reviewed such materials and considered such
financial and other factors as we deemed relevant under the
circumstances, including:
1. the Form 10-KSB and related financial information
for the fiscal year ended December 31, 1997 and the
Form 10-QSB and the related unaudited financial
information for the quarterly period ended March
31, 1998 for AmREIT;
-1-
2. the Forms 10-KSB and related financial information
for the fiscal year ended December 31, 1997 and the
Forms 10-QSB and the related unaudited financial
information for the quarterly period ended March
31, 1998 for each of Fund IX and Fund X and
unaudited financial statements for each of the
other Partnerships for the year ended December 31,
1997 and for the quarterly period ended March 31,
1998;
3. The audited rental income statements for the
Partnerships for the years ended December 31, 1996
and 1997;
4. certain information, including projections,
relating to the business, earnings, cash flow,
assets and prospects of AmREIT furnished to us by
the Management of AmREIT ("Management");
5. certain information, including projections,
relating to the business, earnings, cash flow,
assets and prospects regarding the properties of
each partnership provided to us by Mr. H. Kerr
Taylor on behalf of the General Partners of each
Partnership;
6. certain information provided by Mr. Taylor and
Management relating to the properties of the
Partnerships, including projections of net
operating income for 1998 based on Mr. Taylor's and
Management's review and analysis of the properties
and lease profiles of the Partnerships;
7. the historical offering prices for the Shares and
certain publicly traded companies we deemed to be
reasonably similar to AmREIT, the historical and
projected results of operations of AmREIT, and
historical and certain future earnings estimates of
selected companies we deemed to be reasonably
similar to AmREIT.
8. publicly available financial, operating and stock
market data concerning certain companies engaged in
businesses we deemed comparable to AmREIT or
otherwise relevant to our inquiry.
9. the financial terms of certain recent transactions
we deemed relevant;
10. drafts, dated June___, 1998, of the form of the
Merger Agreement; and
-2-
11. such other financial studies, analyses and
investigations and such other matters we deemed
necessary.
We have assumed, with your consent, that the drafts of the
Merger Agreements which we reviewed will conform in all material
respects to those documents when in final form.
We have met with Management of AmREIT to discuss: (i) the
prospects for their business, (ii) their estimate of such business'
future financial performance, (iii) the financial impact of the
Merger on AmREIT, and (iv) such other matters as we deemed
relevant. We have also visited selected Partnership properties.
In preparing our opinion, we have relied on the accuracy and
completeness of publicly available information and all of the
information supplied or otherwise made available to us by AmREIT
and the Partnerships, including the financial projections for
AmREIT and of each of the properties owned by the Partnerships, and
we have not independently verified such information or undertaken
an independent appraisal of the assets of AmREIT or the
Partnerships. With respect to the projections furnished by AmREIT
and the Partnerships, we have assumed that they have been
reasonably prepared and reflect the best currently available
estimates and judgment of Management and Mr. Taylor as to the
expected future financial performance of the respective entities.
Further, our opinion is based on economic, financial and market
conditions as they exist and can be evaluated as of the date
hereof.
As you know, we have been retained by AmREIT to render this
opinion in connection with the Merger and will receive a fee for
such service. We may actively trade the Shares for our own account
and for the accounts of customers and accordingly, may at any time
hold a long or short position in such securities. This letter and
the opinion expressed herein may not be reproduced, summarized,
excerpted from or otherwise publicly referred to or disclosed in
any manner, without our prior written consent; provided, AmREIT may
set forth in full this letter in any proxy statement relating to
the Merger sent to the AmREIT shareholders.
Our opinion expressed herein is provided for the use of the
Independent Directors of AmREIT in the evaluation of the Merger,
and our opinion is not intended to be, and does not, constitute a
recommendation to any shareholder of AmREIT as to how such
shareholder should vote in connection with the Merger.
-3-
On the basis of, and subject to, the foregoing, we are of the
opinion that, as of the date hereof, the consideration to be paid
by AmREIT pursuant to the Merger is fair to AmREIT and its
Shareholders from a financial point of view.
Very truly yours,
BISHOP-CROWN INVESTMENT RESEARCH, INC.
-4-
Form of
HOULIHAN FAIRNESS OPINION
ANNEX 5
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
[HOULIHAN LOKEY LETTERHEAD]
THIS DRAFT IS FURNISHED SOLELY TO INDICATE THE EXPECTED FORM OF
THE FINAL OPINION AND THE PROCEDURES AND UNDERLYING ASSUMPTIONS
EXPECTED TO BE USED. THE TEXT OF THE FINAL OPINION WILL
NECESSARILY DEPEND UPON OUR REVIEW PROCEDURES, INCLUDING REVIEW
BY COUNSEL, WHICH WILL NOT BE COMPLETED UNTIL SHORTLY BEFORE THE
FINAL LETTER IS DELIVERED.
June 19, 1998
Mr. H. Kerr Taylor in his capacity as President
and principal shareholder [and individual general partner]
of [name of partnership]
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers
Trust Inc. ("AmREIT"), and [name of partnership](the
"Partnership"). AmREIT has recently completed a transaction
pursuant to which it acquired its advisor, American Asset
Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property
management and other related services to the Partnerships
pursuant to an Omnibus Service Agreement (the "Service
Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have
been assumed by a wholly owned subsidiary of AmREIT.
Additionally, prior to the Advisor Acquisition, the Advisor was
owned by Kerr Taylor, who was (and is) a shareholder of AmREIT.
As a result of the Advisor Acquisition, Mr. Taylor increased his
ownership interest in AmREIT. Mr. Taylor serves a President and
is the sole or principal shareholder of the corporate general
partner (the "General Partner") [and serves as individual general
partner of the Partnership (collectively, the "General
Partners")] The Partnership owns interests in [number of
properties] retail properties. Following the Adviser
Acquisition, Mr. Taylor and his affiliated corporation retained
their fiduciary responsibilities associated with such General
Partner(s) of the Partnership.
[name of partnership] - fairness opinion
Mr. H. Kerr Taylor, in his capacity as
President and principal shareholder [and individual General Partner]
of [name of partnership]
June 19, 1998
Page 2
Finally, we understand that AmREIT has entered into a plan to
acquire the Partnership (the "Partnership Acquisition"). The
Partnership Acquisition and other related transactions disclosed
to Houlihan Lokey are referred to collectively herein as the
"Transaction."
AmREIT and the General Partner(s) have requested that Houlihan
Lokey have requested our opinion (the "Opinion") as to the
matters set forth below. The Opinion does not address AmREIT's,
the General Partner['s] or the Partnership's underlying business
decision to effect the Transaction. We have not been requested
to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership.
Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and
appropriate under the circumstances. Among other things, we
have:
THIS LIST WILL BE FORTHCOMING....
1. reviewed AmREIT's annual reports to shareholders and on
Form 10-K for the fiscal years ended 19__ and quarterly
reports on Form 10-Q for the __________ quarters ended
___________, 19__, and AmREIT prepared interim
financial statements for the period ended _______,
19__, which the AmREIT's management has identified as
being the most current financial statements available;
2. reviewed copies of the following agreements:
___________________________________________
___________________________________________
___________________________________________
[insert, e.g., Merger Agreements, Indentures, key
agreements];
3. reviewed the final [proxy statement], dated
______________, 19__;
4. met with certain members of AmREIT's senior management
and the General Partner to discuss the operations,
financial condition, future prospects and projected
[name of partnership] - fairness opinion
Mr. H. Kerr Taylor, in capacity as
President and principal shareholder [and individual General Partner]
of [name of partnership]
June 19, 1998
Page 3
operations and performance of AmREIT and the
Partnership, and met with representatives of AmREIT's
and the Partnership's independent accounting firm, and
counsel to discuss certain matters;
5. visited certain facilities and business offices of the
General Partner and AmREIT;
6. reviewed forecasts and projections prepared by the
General Partner[s] with respect to the Partnership for
the years ended __________, 19__ through 19__ and
reviewed forecasts and projections prepared by AmREIT's
management with respect to AmREIT for the years ended
__________;
7. reviewed the historical market prices for the AmREIT's
publicly traded securities;
8. reviewed certain other publicly available financial
data for certain companies that we deem comparable to
the Partnership and AmREIT, and publicly available
prices and premiums paid in other transactions that we
considered similar to the Transaction;
9. reviewed drafts of certain documents to be delivered at
the closing of the Transaction; and
10. conducted such other studies, analyses and inquiries as
we have deemed appropriate.
We have relied upon and assumed, without independent
verification, that the financial forecasts and projections
provided to us have been reasonably prepared and reflect the best
currently available estimates of the future financial results and
condition of AmREIT and the Partnerships and that there has
been no material change in the assets, financial condition,
business or prospects of AmREIT or the Partnership since the date
of the most recent financial statements made available to us.
[name of partnership] - fairness opinion
Mr. H. Kerr Taylor, in his capacity as
President and principal shareholder [and individual General Partner]
of [name of partnership]
June 19, 1998
Page 4
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to AmREIT or the
Partnerships and do not assume any responsibility with respect to
it. We have not made any physical inspection or independent
appraisal of any of the properties or assets of AmREIT or the
Partnerships. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our
opinion that the aggregate consideration to be received by the
limited partners of [name of partnership] in connection with the
Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
[name of partnership] - fairness opinion
CONSENT FORMS AND LETTER OF INSTRUCTIONS
ANNEX 6
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
PARTNERSHIP CONSENT FORM
[Name of Partnership]
Reference is made to the Joint Consent Solicitation
Statement and Prospectus dated July ___, 1998 (the "Prospectus")
and to the Partnership Letter of Instructions. This Consent Form
incorporates by reference the representations, warranties,
covenants and agreements set forth in the Letter of Instructions.
The undersigned hereby votes all of his or her Partnership
interests ("Units") in the above-referenced Partnership as to the
following matters regarding the Partnership's proposed Merger
with AmREIT, Inc. ("AmREIT") and the Partnership Amendment.
Please put an "X" in the appropriate box to vote "YES" in favor
of the Merger and the related Amendments to your Partnership
Agreement (as described in the Letter of Instructions), "NO"
against the Merger and the Partnership's Amendment, or to
"ABSTAIN" from voting. If you sign and return this Consent Form
without indicating a vote with respect to the Merger, you will be
deemed to have voted "YES" in favor of the Merger, and for the
adoption of the related Amendment to the Partnership Agreement
(the "Partnership Amendment." THE GENERAL PARTNER RECOMMENDS
THAT YOU VOTE "YES" ON THE MERGER.
[ ] "YES," I approve of my Partnership's participation in the
Merger and the adoption of the Partnership Amendment. Unless
I choose to receive a 6.0% Note by marking the box below, I
will receive shares of AmREIT Common Stock ("Shares") in
the Merger.
[ ] I vote Yes for the Merger, but I choose to receive a
6.0% Note instead of Shares: I hereby choose to receive a
6.0% Note rather than Shares, subject to the Note
Restriction.
[ ] "NO," I do not approve of my Partnership's participation in
the Merger or the adoption of the Partnership Amendment.
Unless I choose to receive Shares by marking the box below,
I will receive a 6.0% Note in the Merger if it is approved
by my Partnership and consummated. THE GENERAL PARTNER
RECOMMENDS THAT YOU CHOOSE TO RECEIVE SHARES IN THE MERGER.
[ ] I vote No on the Merger, but I choose to receive Shares
instead of Notes: If the Merger is approved and
consummated, I hereby elect to receive Shares.
[ ] "ABSTAIN", I abstain from voting on the Merger. Unless I
choose to receive a 6.0% Note by marking the box below, I
will receive Shares if the Merger is approved by my
Partnership and consummated.
[ ] I Abstain from voting, but I choose to receive a 6.0%
Note instead of Shares: If the Merger is approved and
consummated, I hereby elect to receive a 6.0% Note.
PLEASE DATE, SIGN AND MAIL THIS CONSENT FORM EXACTLY AS YOUR NAME
APPEARS ON THE MAILING LABEL, UNLESS YOUR NAME IS PRINTED
INCORRECTLY.
SEE REVERSE SIDE
( ) SIGNATURE
MAILING LABEL _________________________________________
(Includes name of Partnership Signature
and number of Units held)
_________________________________________
( ) Print Name
Dated: __________________________________
[Back of Page]
Further Agreements
By signing this Consent Form, you hereby covenant and agree,
if the Merger is approved by a majority of the Units of the
Partnership: (a) to be bound by the terms of the Agreement and
Plan of Merger, and (b) to execute and deliver (and you hereby
irrevocably appoint each General Partner of the Partnership(s) in
which you own Units as your attorney-in-fact to execute and
deliver on your behalf) such additional documents and instruments
as may be reasonably required to consummate the Merger including,
without limitation, the Partnership Amendment. The foregoing
power of attorney is hereby declared to be irrevocable and a
power coupled with an interest, and it shall survive your
subsequent death, incompetency, dissolution, disability,
incapacity, bankruptcy or termination and shall extend to your
heirs, successors and assigns. Each person signing this Consent
Form also affirms and makes the other representations,
warranties, covenants and agreements set forth in the Letter of
Instructions.
IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE IN COMPLETING
THE CONSENT FORM, PLEASE CALL AMREIT, INC., TOLL-FREE AT 1-800-888-4400.
[Back of Page]
H. KERR TAYLOR
__________________
8 Greenway Plaza, Suite 824
Houston, Texas 77046
[Date]
Re: Letter of Instructions: Consent Form for AmREIT
Merger with Participating Partnerships
___________________________________________________
Dear Limited Partner:
As more particularly described in the Joint Consent
Solicitation Statement and Prospectus dated July ___, 1998 (the
"Prospectus"), a copy of which is enclosed with this Letter of
Instructions, AmREIT, Inc. ("AmREIT") and H. Kerr Taylor (the
"General Partner") are proposing to consolidate the businesses of
the following limited partnerships (the "Partnerships") with the
business of AmREIT (the "Merger").
Taylor Income Investors III, Ltd., a Texas Limited Partnership
Taylor Income Investors IV, Ltd., a Texas Limited Partnership
Taylor Income Investors V, Ltd., a Texas Limited Partnership
Taylor Income Investors VI, Ltd., a Texas Limited Partnership
AAA Net Realty Fund VII, Ltd., a Texas Limited Partnership
AAA Net Realty Fund VIII, Ltd., a Texas Limited Partnership
AAA Net Realty Fund IX, Ltd., a Nebraska Limited Partnership
AAA Net Realty Fund X, Ltd., a Nebraska Limited Partnership
AAA Net Realty Fund XI, Ltd., a Texas Limited Partnership
AAA Net Realty Fund Goodyear, Ltd., a Texas Limited Partnership
Persons holding Limited Partner interests ("Units") in a
Partnerships which participates in the Merger (a "Participating
Partnership") may elect to receive either:
(1) Shares of AmREIT's $0.01 par value common stock
(the "Shares"), or
(2) AmREIT's 6.0% Notes due December 31, 2004 (the
"Notes").
The Shares and Notes will be issued to the Limited Partners
based on the Net Asset Values of their Partnership, as described
in the Prospectus.
In the event that a majority of Limited Partners in a
Partnership do not approve their Partnership's participation in
the Merger, such Limited Partners will continue to hold Units and
their Partnership will continue in existence as a limited
partnership, all as more particularly described in the
Prospectus.
[Date]
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Plan of Merger
Pursuant to the Agreement and Plan of Merger (the "Merger
Agreement"), AmREIT would acquire the assets and assume the
liabilities of each Participating Partnership pursuant to a
statutory merger under applicable state law whereby the
Participating Partnership would merge with and into AmREIT. The
Limited Partners of the Participating Partnership would receive
Shares or Notes for their Units. If the Merger is approved,
these transactions would all occur on and as of the Effective
Date.
If the Merger is approved, the Amendment to Partnership
Agreement of each Participating Partnership will be effective.
Voting
Enclosed with this Letter of Instructions is a Consent Form
for your Partnership in which you own Units of record as of
___________, 1998 (the "Record Date"). You are entitled to one
vote per Unit. For each of the Partnerships in which you own
Units you may vote "YES" in favor of the Merger, "NO" against the
Merger or "ABSTAIN" from voting. A vote for the Merger is also a
vote to approve the Amendment to the Partnership Agreement (the
"Partnership Amendment") authorizing the Merge. THE GENERAL
PARTNER RECOMMENDS THAT YOU VOTE "YES" TO THE MERGER.
If you vote "YES" for the Merger and the Merger is approved,
you will receive Shares in the Merger. You may choose to elect
to receive Notes rather than Shares, subject to a Note
Restriction of 20%. THE GENERAL PARTNER RECOMMENDS THAT YOU NOT
CHOOSE TO RECEIVE NOTES IN THE MERGER.
A "NO" vote would require that the voting Limited Partner
receive Notes unless he or she marked the Consent Form to choose
to receive Shares in the Merger. THE GENERAL PARTNER RECOMMENDS
THAT YOU CHOOSE TO RECEIVE SHARES IN THE MERGER.
An "ABSTAIN" vote would require that the abstaining Limited
Partner receive Shares unless the abstaining Limited Partner may
receive Notes in the Merger. THE GENERAL PARTNER RECOMMENDS THAT
YOU NOT CHOOSE TO RECEIVE NOTES IN THE MERGER.
[Date]
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A vote in favor of the Merger will constitute your approval
of the amendment to the Partnership Agreement (the "Amendment").
The General Partner is requesting your consent to the Amendments,
which expressly authorize all actions necessary to complete the
Merger. A form of the Amendment is set forth in the Prospectus
as Annex 2. A vote "NO" against the Merger will constitute a
vote not to merge the Partnership(s) in which you own Units into
AmREIT. If you do not return the Consent Form, you will be
deemed to have abstained from voting with respect to the Merger
and you will receive AmREIT Shares for your Units if the Merger
is approved and consummated.
Election to Receive Shares or Notes
Limited Partners who vote "YES" to the Merger or votes to
"ABSTAIN" will receive Shares if their Partnership participates
in the Merger unless they choose to receive Notes. Limited
Partners who vote "NO" to the Merger will receive Notes unless
they choose to receive Shares. Due to the Note Restriction which
limits the aggregate principal balance of the Notes, AmREIT may
not be in a position to honor the requests of all Limited
Partners in a particular Partnership who vote "YES" to the Merger
and choose to receive Notes because of the Note Restriction. If
the Note Restriction applies, Notes will be issued first to
Limited Partners in that Partnership who voted "NO" to the Merger
("Dissenting Partners"), and thereafter, to Limited Partners who
voted "YES" or "ABSTAIN" to the Merger and choose to receive
Notes. Reference is made to the Prospectus for the complete
terms of the Merger and the factors which should be considered by
you in deciding whether to vote in favor of the Merger. In
addition, capitalized but undefined terms used in this Letter of
Instructions are defined in the Prospectus. You should carefully
review the Prospectus, including, without limitation, the
sections entitled "THE MERGER" and "CONSENT PROCEDURES" for
additional information concerning such matters as the vote
required to approve the Merger and the conditions to the Merger.
You may elect to receive Shares in the event you vote "NO"
to the Merger and the Merger is consummated. THE GENERAL PARTNER
RECOMMENDS THAT YOU CHOOSE TO RECEIVE SHARES.
Delivery of Consent Form
The Consent Form must be received by CHG Properties, Inc.,
the Partnership's Tabulation Agent, on or before the end of the
Solicitation Period, which is, unless sooner terminated, __:__
__.m., Central Standard Time, on _____ ___, 1998, or such later
time and date as may be agreed to by AmREIT and the General
Partner in their sole discretion. Please mail or deliver the
completed Consent Form to:
[Date]
Page 4
_____________________
CHG Properties, Inc.
Attention: AmREIT Merger
11545 West Bernardo Court, Suite 100
San Diego, California 92127
A postage-paid, self-addressed envelope is enclosed for your
convenience.
Withdrawal Rights
The Consent Form may be withdrawn at any time prior to the
end of the Solicitation Period. To be effective, a written or
facsimile transmission notice of withdrawal of the Consent Form
must be received by the Information Agent at the above address.
A notice of withdrawal must specify your name and the Partnership
to which such withdrawal relates. See "CONSENT
PROCEDURES--Withdrawal Rights; Change of Vote" in the Prospectus.
You may submit a second Consent Form after withdrawal of
your first Consent Form, provided the second Consent Form is
submitted prior to the end of the Solicitation Period. You may
obtain a second Consent Form by calling the General Partner at
the telephone number set forth below. If you want to change any
information on a completed Consent Form, you must withdraw the
Consent Form and submit a second Consent Form in accordance with
the instructions contained herein prior to the end of the
Solicitation Period.
Representations and Covenants
By executing the Consent Form you represent and warrant that
as of the date hereof and the date of the consummation of the
Merger (i) you have received a copy of the Prospectus, (ii) you
are the owner of the number of the Units of the Partnership(s)
indicated on the Consent Form and, (iii) you have the power and
authority to execute and deliver the Consent Form. Subject to
approval of the Merger by the requisite vote, you hereby covenant
and agree (a) to be bound by the terms of the Merger Agreement,
and (b) authorize the General Partner to execute and deliver as
your attorney-in-fact under the Partnership Agreement such
documents and instruments as may be reasonably required to
consummate the Merger including, without limitation, the
Amendment to the Partnership Agreement.
Signature
In order for your vote to be counted, you must sign the
enclosed Consent Form and mail it in the enclosed envelope.
Please sign the Consent Form exactly as your name is printed on
the mailing label attached to the Consent Form, unless the name
is printed incorrectly. When signing as a general partner,
[Date]
Page 5
____________________
corporate officer, attorney-in-fact, executor, administrator or
guardian, please give your full title and send proper evidence of
authority with the Consent Form. For joint owners, each joint
owner must sign. By signing the Consent Form, you hereby agree
to all of the provisions contained in this letter.
If you have any questions regarding the completion of the
Consent Form or the options available, you should call the
General Partner, toll-free at 1-800/888-4400; fax 1-713/658-9720.
Very truly yours,
[Name of Partnership]
By: _____________________________
H. Kerr Taylor
General Partner
Enclosures
AMREIT CONSENT FORM
Reference is made to the Joint Consent Solicitation
Statement and Prospectus dated July ___, 1998 (the "Prospectus")
and to the AmREIT Letter of Instructions.
The undersigned hereby votes all of his or her Shares of
Common Stock of AmREIT ("Shares") for the merger with any one or
more of the Partnerships. Please put an "X" in the appropriate
box to vote "YES" in favor of the Merger, "NO" against the
Merger, or to "ABSTAIN" from voting. If you sign and return this
Consent Form without indicating a vote with respect to the
Merger, you will be deemed to have voted "YES" in favor of the
Merger.
MERGER PROPOSAL. Proposal that AmREIT, Inc.
acquire one or more of the Partnerships described
in the Joint Consent Solicitation Statement and
Prospectus dated July ___, 1998 (the "Prospectus")
pursuant to the terms and conditions described in
the Prospectus.
[ ] YES [ ] NO [ ] ABSTAIN
THE BOARD OF DIRECTORS AND MANAGEMENT
RECOMMEND THAT YOU VOTE "YES" ON THE MERGER.
IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE IN COMPLETING
THE CONSENT FORM, PLEASE CALL AMREIT, INC., TOLL-FREE AT 1-800-888-4400.
PLEASE DATE, SIGN AND MAIL THIS CONSENT FORM EXACTLY AS YOUR NAME
APPEARS ON THE MAILING LABEL, UNLESS YOUR NAME IS PRINTED
INCORRECTLY.
( ) SIGNATURE
MAILING LABEL _______________________________________
(Includes name of Partnership Signature
and number of Units held)
_______________________________________
( ) Print Name
Dated: ________________________________
